Mortgage application volume soared last week as interest rates fell to their lowest levels in two years, spurred by expectations that the Federal Reserve will cut rates further. Total app volume surged 14.2 percent compared with the previous week, the Mortgage Bankers Association’s seasonally adjusted index said. The spike in activity comes as borrowers anticipate a possible reduction in rates, as the Federal Reserve is likely to announce its first interest rate cut in four years. 

Although mortgage rates have nothing to do with the Federal Reserve policies directly, they happen to react to the general state of economy and its overall market expectations. As a matter of fact, according to Matthew Graham, chief operating officer for Mortgage News Daily, Fed cuts do affect mortgage rates but the cut is already incorporated in the current rates.  

“The most important takeaway is that the lower mortgage rates are not confirmed by Fed’s rate cut. They’re already baked in, and depending on what Fed Chairman Jerome Powell will say after the decision, he said, referring to what volatility may potentially arise from this.” 

Average contract interest rates for 30-year fixed-rate mortgages with conforming loan balances decreased to 6.15 percent, the lowest since September 2022. That is a substantial decrease compared to a year ago when rates were 116 basis points higher. The drop-in rates have stimulated a surge of refinancing activity, as applications to refinance home loans increased 24% from the previous week, and 127% compared with the same week last year. Many of them probably purchased their homes during a time when rates were rising, following a period that already had seen record lows in the pandemic. 

While it was an extremely strong month, refinancing volumes remain relatively low because many borrowers took out loans at interest rates well below 5% during the pandemic. Conventional and government refinancing activity both rose to the fastest pace since 2022. 

Apps for purchasing a home, along with refinancing, are up 5% from last week but are still down 0.4% compared with the same period a year ago. And one of the reasons it’s not rising faster is improving affordability conditions, something that is aided by falling mortgage rates and slower growing home prices. At least according to Joel Kan, a Mortgage Bankers Association economist. “It’s impressive that conventional purchase applications were up a level over last year and lifted overall purchase applications to within a percentage point of last year’s,” Kan said. 

With this eminent decision by the Federal Reserve, the housing market will respond with increased sensitivity towards changes in rates, meaning more fluctuation in mortgage demand will be expected.