Last week saw a significant drop in U.S. mortgage rates. While this has helped sustain the momentum in refinancing growth, it does not appear to have stimulated home purchase demand.

According to the Mortgage Bankers Association's seasonally adjusted index, overall mortgage application volume was essentially flat compared to the previous week, rising by a mere 0.4%.

The average contract rate for a 30-year fixed-rate mortgage—for conforming loan balances of $832,750 or less—fell from 6.17% to 6.09%. Points, including the origination fee, decreased from 0.56 to 0.53 for loans with a 20% down payment. This marks the lowest level since September 2022.

Refinance application volume increased by 4% last week from the previous week and surged 150% compared to the same period last year, when rates were 79 basis points higher. Refinancing activity has been quite active recently as rates have declined. Although the year-over-year increase is substantial, it is important to note that refinance application volume was at a very low level at this time last year.

Purchase mortgage application volume fell by 5% last week but remained 12% higher than the same week one year ago. Although lower mortgage rates have improved affordability, home prices are still slightly higher than a year ago, and economic uncertainty is also prompting consumers to be cautious.

Real estate brokerage Redfin noted in a report that, affected by uncertainty, nearly 40,000 home purchase agreements were canceled nationwide in January. This accounted for 13.7% of homes under contract, higher than the 13.1% rate seen a year earlier and the highest January level since 2017.

Borrowers are also increasing their demand for Adjustable-Rate Mortgages (ARMs). These loans carry slightly higher risk but offer lower rates.

"ARM rates remain more than 80 basis points lower than conforming fixed rates, so the ARM share of applications has stayed above 8%," said Joel Kan, an economist at the Mortgage Bankers Association, in a statement. "This provides an incentive for payment-sensitive borrowers or homebuyers seeking larger loans to consider these products."