Mortgage rates hit lowest level in nearly 4 years, but homebuyers are still stuck on the sidelines

Mortgage rates dropped sharply last week, and while that helped to prolong gains in refinancing, homebuyer demand seemed unimpressed.

Total mortgage application volume was essentially flat, rising just 0.4% compared with the previous 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, $832,750 or less, decreased to 6.09% from 6.17%, with points decreasing to 0.53 from 0.56, including the origination fee, for loans with a 20% down payment. That was the lowest level since September 2022.

Applications to refinance a home loan increased 4% last week from the week before and were 150% higher than the same week one year ago, when rates were 79 basis points higher. Refinancing has been on a bit of a tear lately, as rates drop. While the comparisons to a year ago are quite large, it is important to take into account that refinancing was quite low at this time last year.

Applications for a mortgage to purchase a home dropped 5% for the week and were 12% higher year-over-year. While lower mortgage rates are improving affordability, home prices are still slightly higher than they were at this time last year and economic uncertainty is weighing heavily on consumers.

Redfin cited this uncertainty in a report showing that nearly 40,000 home-sale agreements nationwide were canceled in January, equal to 13.7% of homes that went under contract. That’s up from 13.1% a year ago and the highest January share in records dating back to 2017.

Borrowers are also sought more savings in adjustable-rate mortgages (ARMs), which are slightly riskier but offer lower rates.

“The ARM share stayed above 8 percent, as ARM rates remained more than 80 basis points below conforming fixed rates,” said Joel Kan, an MBA economist in a release. “This is giving payment-sensitive borrowers or those seeking larger loans, an incentive to choose this product offering.”