A key measure of home-purchase applications rose for the fifth straight week as an ongoing drop in mortgage rates reignited demand among consumers.
The Mortgage Bankers Association's (MBA) index of mortgage applications rose 2.8% last week, compared with the previous week, according to new data published Wednesday.
The data also showed that the average rate on the popular 30-year loan dropped to 7.17% – the lowest level since August. That is also a notable drop from just one month ago, when rates hovered around 7.91%.
"Slower inflation, and financial markets anticipating the potential end of the Fed’s hiking cycle, are both behind the recent decline in rates," said Joel Kan, MBA's vice president and deputy chief economist.
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The decline in rates helped to spur more housing demand, with applications for a mortgage to purchase a home climbing 35% for the week. Still, application volume remains down 17% compared with the same time last year as the housing market continues to face chronically low inventory and an affordability crisis.
It also sparked fresh demand for refinancing, which surged 14% from the previous week and is up 10% from the same week one year ago.
"Refinance applications saw the strongest week in two months, increasing on a year-over-year basis for the second consecutive week for the first time since late 2021," Kan said. "The overall level of refinance applications is still very low, but recent increases could signal that 2023 was the low point in this cycle for refinance activity, consistent with our originations forecast."
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The interest rate-sensitive housing market cooled rapidly following the Federal Reserve's aggressive tightening campaign. Policymakers have raised the benchmark federal funds rate 11 consecutive times since March 2021 in an attempt to crush stubborn inflation and slow the economy.
Officials signaled during their policy-setting meeting in November that another rate hike is on the table this year – and that rates are likely to remain elevated for some time. But many economists believe the central bank is done raising interest rates, which has helped to bring down painfully high mortgage rates.
The higher mortgage rates have not only dampened consumer demand over the past year, but also severely limited inventory. That is because sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell with rates continuing to hover near a two-decade high, leaving few options for eager would-be buyers.
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A recent report from Realtor.com shows that the total number of homes for sale, including those that were under contract but not yet sold, fell by 4% in September, compared with the same time a year ago.
Available home supply remains down a stunning 45.1% from the typical amount before the COVID-19 pandemic began in early 2020, according to the report.
