MBA also reports reduced lender appetite for jumbo loans.
Mortgage application volume dropped last week, despite interest rates declining slightly for the first time in three weeks, the Mortgage Bankers Association reported Wednesday.
MBA's Market Composite Index posted a 1.2% seasonally adjusted decrease from the week before and was down 0.4% on an unadjusted basis. The refinance index climbed 1% week over week, while the purchase index dipped 2%.
Demand softened despite a five-basis point drop in the 30-year fixed mortgage rate, down to 6.5% last week, according to MBA chief economist Joel Kan.
"Elevated rates continue to both impact homebuyer affordability and weaken demand for refinancing," Kan said. "Home purchase activity has been very sensitive to rates and local market trends, including the very low supply of existing-home inventory. However, newly constructed homes account for a growing share of inventory, giving more options for prospective buyers."
Kan noted a reduced lender demand for jumbo loans as a fallout of bank failures in recent months.
"The jumbo-conforming spread continues to narrow, an indication that there is reduced lender appetite for jumbo loans following the recent turmoil in the banking sector and heightened concerns about liquidity," he said. "The spread was 13 basis points last week, after being as wide as 64 basis points in November 2022."
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances fell to 6.37% from 6.40% the week prior.