Key Highlights

  • The average 30-year fixed mortgage rate fell to 7.41 percent from 7.50 percent, the first decline in over two months.
  • Total mortgage application volume dropped 5.3 percent for the week on a seasonally adjusted basis, despite the lower rate.
  • Purchase applications fell 7 percent for the week and stood 18 percent below the level of a year earlier.
  • Refinance applications slipped 2 percent for the week and remained 59 percent lower than the same week a year ago.

A Dip in Rates Without a Lift in Demand

Mortgage demand fell for another week even as borrowing costs eased for the first time in more than two months. The Mortgage Bankers Association (MBA) said its seasonally adjusted index of total application volume dropped 5.3 percent from the previous week.

The average contract rate on 30-year fixed-rate mortgages with conforming balances of USD 832,750 or less declined to 7.41 percent from 7.50 percent. Points fell to 0.75 from 0.83, including the origination fee, for loans with a 20 percent down payment. An MBA economist said lower rates were not enough to raise application activity, because both purchase and refinance applications continued to decline.

A Small Pool of Refinancing Borrowers

Applications to refinance a home loan, the category most sensitive to weekly rate moves, fell 2 percent for the week. That was a smaller drop than in some earlier weeks, when rates were moving higher. Refinance demand was still 59 percent below the level of the same week a year earlier.

Rates now sit more than a full percentage point above their level of a year ago. That leaves only a very small pool of borrowers who can gain from refinancing an existing loan.

Buyers Respond to the Level, Not the Weekly Move

Applications for a mortgage to purchase a home fell 7 percent for the week, a steeper decline than the overall index, and were 18 percent lower than a year earlier. Buyers are reacting less to the weekly change in rates and more to the overall higher level.

The National Association of Realtors reported on Tuesday a sharp drop in September pending home sales. The measure is based on signed contracts, so it captured the real-time effect of rising rates during the month. Rates remained at that higher level in October, the month that the latest application data covers.

The Backdrop of Higher Yields

The dip follows a sharp climb in borrowing costs. A separate measure put the 30-year fixed rate at 7.40 percent last week, the highest in nearly three years, up from 7.03 percent in late September and about 6.3 percent a year earlier. The 10-year Treasury yield, the main benchmark for mortgages, stood at 5.11 percent on Monday, October 19.

The Federal Reserve raised its target range to 3.75 percent to 4.00 percent on September 16 and meets again on October 27 and 28. Builder confidence fell in October to its lowest level since June 2012 as higher rates and costs weighed on new-home demand.

Adjustable-Rate Loans Keep Their Share

Among buyers who remain in the market, a continued high share are choosing adjustable-rate mortgages. These loans carry lower initial rates but are considered riskier, because their rate adjusts to the prevailing market rate once the fixed term ends.

The MBA said the adjustable-rate share held steady at 10.5 percent of applications. ARM rates stayed almost a full percentage point below the 30-year fixed rate, which gave qualified borrowers a lower-rate option for buying a home.

What the Daily Rate Surveys Show

A separate daily survey of mortgage rates showed little movement at the start of this week. Last week was particularly volatile because of several monthly inflation reports. This week, the moves in rates have followed oil prices.

The chief operating officer of the firm that runs that survey cautioned against placing too much emphasis on the link between oil and mortgage rates. He described the correlation as highly unreliable for more than a month.