Mortgage Apps Rise on Strong Refinance Activity

A sharp upturn in refinancing activity helped push mortgage application volume to a double-digit gain last month even as purchase loan demand continued to fall.

According to an examination of application numbers by macroeconomic research company Capital Economics, total mortgage application volume jumped 10.1 percent in October, bouncing back after four straight months of declines. The firm's report is based on numbers released weekly by the Mortgage Bankers Association (MBA).

The headline measure received a major boost from refinance applications, which were up 18.5 percent month-over-month to arrive at an eight-month high.

Since falling off last year, refinances have experienced a pickup in recent weeks as average fixed mortgage rates sank to their lowest levels in nearly a year and a half. By MBA's measure, the average 30-year fixed rate for all of October was 4.19 percent.

However, with the Federal Reserve expected to start putting upward pressure on interest rates in the near future, the recent comeback in refinancing isn't expected to last. Indeed, MBA's measure for the last week of October shows refinance application volume fell 6 percent week-over-week as the average 30-year rate moved slightly upward to 4.17 percent.

"[R]efinancing activity cannot increase much further without a sustained decline in mortgage rates, which is not on the cards," said Paul Diggle, property economist at Capital Economics.

As refinances spiked, home purchase applications continued to languish, dipping 0.5 percent after a gain of the same amount in September. The decline in that measure lines up with the Federal Reserve's most recent Loan Officer Opinion Survey, which showed demand for mortgages dropping on net in all loan categories.

The ongoing weakness in the purchase loan index—considered a key indicator of consumer demand for housing—has been a major source of concern for market participants as refinancing has come down from its boom.

Still, Diggle remains hopeful.

"Lenders responding to the Senior Loan Officer Survey reported loosening standards on mortgage credit for the second consecutive quarter," he said. "Alongside strong job growth and signs that income growth is finally picking up, there are grounds to think that mortgage demand will rise from here."