US mortgage demand rises even as 30-year rate hits highest since August

US mortgage applications increased last week even as borrowing costs moved higher, with the Mortgage Bankers Association’s seasonally adjusted index of total mortgage demand rising 1.9% from the prior week. The gain was driven by home-purchase loans, suggesting some buyers are returning as inventory improves and sellers show more willingness to reduce asking prices.

The average contract rate on a 30-year fixed mortgage for conforming balances of $832,750 or less rose to 6.69% from 6.65%, according to the MBA. That was the highest level since last August. Points on those loans, including the origination fee, declined to 0.62 from 0.67 for borrowers making a 20% down payment.

Mortgage points are upfront charges paid to a lender and are often used to adjust the interest rate on a loan. A quoted mortgage rate can therefore move differently from the all-in cost depending on how points change, which makes both figures relevant for borrowers comparing offers.

Purchase applications improve

Applications for mortgages to buy homes rose 6% for the week, the MBA said. Compared with the same week a year earlier, purchase applications were up 0.2%, a level that was broadly flat.

That modest improvement came as the housing market entered its slower summer period. Real estate agents surveyed in CNBC’s Housing Market Survey said sellers appear more open to cutting prices, a shift that may be easing some affordability pressure for prospective buyers.

Mike Fratantoni, the MBA’s senior vice president and chief economist, linked the increase in purchase activity to a broader supply shift. “Growing home inventory in many markets is supporting more purchase activity,” Fratantoni said.

Higher inventory can alter the bargaining position between buyers and sellers. When more homes are available, buyers may face less competition and have more scope to negotiate price or terms, though the effect varies by local market and does not remove the impact of higher financing costs.

Refinancing weakens as rates rise

Refinance applications fell 2% during the week, according to the MBA. They were 7% higher than the comparable week a year earlier, when the average 30-year fixed mortgage rate was only 15 basis points above the latest level.

Refinancing tends to be more sensitive to small changes in rates than purchase activity because existing homeowners often need a clear reduction in monthly payments or other loan terms to justify replacing a mortgage. With rates near recent highs, fewer borrowers have that incentive.

Fratantoni said incoming data showed inflation eased in June, but he also pointed to renewed pressure from energy prices. “With oil prices spiking again, that improvement seems unlikely to continue in July data, and mortgage rates are likely to remain higher as a result,” he said.

Mortgage News Daily reported separately that mortgage rates climbed further at the start of the week, reaching their previous high from mid-May. The outlet said new escalations in the war with Iran outweighed the effect of last week’s cooler-than-expected inflation reports.

Matthew Graham, chief operating officer at Mortgage News Daily, said fuel prices offered a useful explanation for the rate move. “In fact, August gasoline futures also just hit their May 19th highs this week, perfectly aligning with the round trip in rates,” Graham wrote.

This story draws on original reporting from CNBC.