Despite a slight easing in mortgage interest rates last week, potential homebuyers remain hesitant to enter the market. According to the Mortgage Bankers Association (MBA), the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased marginally to 6.82% from 6.87%, with points increasing to 0.59 from 0.57 (including the origination fee) for loans with a 20% down payment. This marks the lowest level since February of this year.

Over the past few weeks, rates have dropped more than twenty basis points. However, mortgage applications for home purchases still declined by 4% last week compared to the previous week, according to the MBA’s seasonally adjusted index. Purchase demand is currently 15% lower than the same week a year ago. (Note: A basis point is one-hundredth of a percentage point.)

“Purchase applications decreased due to ongoing affordability challenges with current rate levels and strong home-price appreciation in many markets,” said Joel Kan, an MBA economist, in a statement.

Potential homebuyers are likely waiting for further reductions in interest rates. There is an expectation that the Federal Reserve will lower its rate in September. While mortgage rates do not directly follow the Fed’s rates, they are influenced by the yield on the 10-year Treasury. If investors believe inflation is easing, mortgage rates are likely to decrease.

“I think affordability remains stretched,” said analyst Ivy Zelman in an interview on CNBC’s “The Exchange.” “We’d probably need mortgage rates to drop by 100 basis points. If rates were in the high fives, the market could see more momentum.”

Applications to refinance home loans were essentially unchanged, increasing by just 0.3% for the week. However, demand is 38% higher than the same week a year ago, albeit from a very low level. Current rates are slightly lower than they were at this time last year.

“Refinance applications were up, driven by conventional and FHA application activity, as some borrowers took the opportunity to act. Furthermore, the conventional refi index reached its highest level since September 2022,” added Kan.

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