The Mortgage Bankers Association reports that mortgage applications for purchasing or refinancing a home were down 3.5% last week. In what seems to be an ocean of positive signs for the economy, this one sounds like a step in the wrong direction. So what's causing the problem? There are several factors at play, but the most significant is mortgage rates.

This can be seen through refinancing activity, as purchases are actually up. Bloomberg explains:

The mortgage bankers' refinancing gauge decreased to 1,853.8 from 1,996.7 the previous week, today's report showed. The purchase index climbed to 267.2, the highest level in more than a month, from 264.4.



The major driver for refinancing is interest rates. Interest rates still tend to be relatively low, but have increased recently. Bloomberg further notes:

The average rate on a 30-year fixed-rate loan increased to 5.38 percent last week from 5.17 percent the prior week. The rate reached 4.61 percent at the end of March, the lowest level since the group's records began in 1990.



Back in March, during those record lows, refinancing activity heated up. But the rates we're seeing now aren't that historically unprecedented. Here's a chart I made based on the national average mortgage rate for a 30-year fixed rate mortgage, based on data from mortgage-x.com:

national mortgage rates.PNG


As you can see, over the past 6 years, mortgage rates have flirted with the 5.5% level several times. The housing boom was not only created by new purchases, but also by a vast amount of refinancing, since rates were quite low over this time period. Anyone who refinanced at a rate in that ballpark less than 6 years ago probably isn't too interested in refinancing now at a similar interest rate.

What about Americans dealing with those ugly adjustable-rate mortgages we've heard so much about? Many of them likely aren't refinancing right now either, for two reasons. First, as rates remain low, so does their current payment if it recently reset. Second, many of these homeowners are subprime borrowers, so probably have trouble finding a bank willing to refinance their mortgage, even if they seek a fixed rate.

If rates continue to increase, refinancing will continue to decrease. I'm not sure that's as dire an outcome as some might think, however. The more important factor is that new purchases are made so that housing's excess inventory continues to decrease and prices stabilize. Despite the fact that the overall number of mortgage applications are down, since purchase applications are up, that still indicates that housing is moving in a positive direction. That is, unless new buyers begin to find that bargain home prices are eclipsed by interest rates that have risen too dramatically.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.