Mortgage rates drop for the first time in 2 months, but demand still falls further

Key points

• Total mortgage application volume fell 5.3% last week from the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.
• The average contract interest rate for 30-year fixed-rate mortgages of $832,750 or less dropped to 7.41% from 7.50%, the first decrease in over two months.
• Purchase applications fell 7% for the week and were 18% lower than a year earlier, while refinance applications dropped 2% and were 59% lower year over year.

Mortgage demand declined again last week even as the average rate on a 30-year fixed loan fell for the first time in more than two months. Total mortgage application volume dropped 5.3% week to week, according to the Mortgage Bankers Association's seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $832,750 or less fell to 7.41% from 7.50%, with points decreasing to 0.75 from 0.83. The figure includes the origination fee and applies to loans with a 20% down payment.

Purchase and refinance activity

Refinance applications fell 2% week to week, a smaller decline than in some earlier weeks when rates were climbing, but remained 59% below the same week a year ago. The MBA said the pool of borrowers who could benefit from a refinance is very small, with rates now more than a full percentage point higher than a year earlier.

Purchase applications dropped 7% for the week and were 18% lower than the year before. The MBA said buyers are responding more to the overall level of rates than to weekly changes. A National Association of Realtors report on Wednesday showed a sharp drop in September pending home sales, which are based on signed contracts.

What the economist said

Joel Kan, an MBA economist, said in a release that mortgage rates decreased for the first time in over two months, but that lower rates were not enough to boost application activity, as both purchase and refinance applications continued to decline.

Kan also said the share of adjustable-rate loans held steady at 10.5%, with ARM rates almost a full percentage point below the 30-year fixed rate. A separate Mortgage News Daily survey showed little rate movement early this week, after a volatile week driven by monthly inflation reports; this week's moves have appeared to follow oil prices.

Oil price caution

Matthew Graham, chief operating officer at Mortgage News Daily, cautioned against reading too much into the oil price link. He said it "has been highly unreliable for more than a month."