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Mortgage Demand Slides Even as Rates Hit Multi-Month Low

In a surprising twist for the housing market, mortgage demand continues to fall even as borrowing costs reach their lowest levels since April. According to the latest data from the Mortgage Bankers Association (MBA), applications for home loans dropped last week, signaling growing unease among potential buyers despite slightly more favorable interest rates.

The MBA’s seasonally adjusted index shows that mortgage applications for home purchases fell by 3% compared to the previous week. Although demand remains 14% higher than during the same period a year ago, this week’s decline suggests that homebuyers remain hesitant amid broader economic concerns.

Rates Drop to 6.84% — But It's Not Enough to Reignite Demand

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances — defined as loans of $806,500 or less — slipped to 6.84% last week, down from 6.93% the previous week. That marks the lowest average rate since April, though it remains only marginally lower than rates from a year ago, which stood just 10 basis points higher.

Borrowers taking out these loans with a 20% down payment saw points rise slightly to 0.66 from 0.64 (including the origination fee), adding some additional upfront cost.

“Mortgage rates decreased last week, driven largely by financial market volatility linked to ongoing geopolitical tensions and persistent uncertainty surrounding international trade policies,” explained Joel Kan, vice president and deputy chief economist at the MBA.

Yet despite this modest rate relief, many homebuyers appear to be sitting on the sidelines, cautious in the face of shaky consumer confidence, volatile stock markets, and unpredictable global developments.

Refinancing Activity Also Slows Despite Lower Rates

Not only did purchase applications decline, but demand for refinancing also weakened. Refinance applications, which typically respond more directly to fluctuations in interest rates, fell 2% last week. However, refinance activity still remains 25% higher compared to the same week in 2024, reflecting lingering pent-up demand from earlier periods of higher rates.

“Refinance activity declined for both conventional and government-backed loans,” Kan added. However, not all segments saw contraction. “VA (Veterans Affairs) applications bucked the trend with a 2% increase in purchase applications and a slight uptick in refinance activity.”

The average loan size across all applications fell to $380,200, marking the lowest level since January 2025 — a possible signal that some buyers are scaling down their purchasing ambitions as affordability remains stretched.

Economic Uncertainty Casts a Long Shadow

Despite the recent moderation in mortgage rates, homebuyers appear highly sensitive to the broader economic picture. Recent releases of inflation data, labor market reports, and mixed corporate earnings have fueled uncertainty. The lack of decisive movement in rates early this week suggests that markets are waiting for further guidance.

The Federal Reserve’s upcoming policy announcement looms large over both mortgage markets and the broader economy. However, as Matthew Graham, chief operating officer at Mortgage News Daily, emphasized, “This has nothing to do with ‘cut vs no cut’ (there is zero chance of a rate cut) and everything to do with the other information the Fed presents on announcement days.”

Specifically, all eyes will be on the Fed’s closely watched “dot plot” — a visual chart included in the Fed’s Summary of Economic Projections, showing each policymaker’s interest rate forecast for the coming years. Any unexpected shifts in these projections could trigger sharp reactions in both mortgage rates and housing market sentiment.

The Road Ahead: Fragile Confidence, Limited Momentum

While the recent rate drop may offer a sliver of hope for prospective buyers, the combination of persistent affordability challenges, economic headwinds, and global instability continues to weigh heavily on the housing market’s recovery.

Until consumer sentiment rebounds and inflation trends stabilize, mortgage demand may continue to fluctuate, leaving both buyers and lenders facing an uncertain second half of 2025.