Higher mortgage rates and a severe shortage of homes for sale are taking their toll on mortgage demand.

Mortgage applications to purchase a home dropped 4.8% last week, compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 26% lower than the same week one year ago.

“Purchase applications decreased to the slowest pace in a month, as buyers remain wary of this rate volatility, but also as for-sale inventory in many parts of the country remains scarce,” wrote Joel Kan, an MBA economist, in a release.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.57% from 6.48%, with points remaining at 0.61 (including the origination fee) for loans with a 20% down payment. That is the highest rate in two months. The 30-year fixed stood at 5.49% the same week one year ago.

Mortgage rates increased last week, even as Treasury yields were essentially flat, with the spread between the two rates widening to 310 basis points.

“Mortgage rates have generally been struggling versus Treasuries since the Fed ended reinvesting its bond portfolio proceeds in late 2022,” explained Matthew Graham, chief operating officer. “More recently, elevated supply of mortgage debt owing to the FDIC’s various liquidation efforts have weighed on the sector.” 

Applications to refinance a home loan fell a steeper 8% for the week, as refinances are much more sensitive to weekly rate changes. Demand was down 43% year over year. With rates more than twice what they were in the first years of the Covid pandemic, there are very few borrowers left who can benefit from a refinance.