Thoughts on mortgage applications and interest rates

According to the Mortgage Bankers Association, mortgage purchase application activity fell for the second week in a row. In fact, the 4.9% decline in the purchase mortgage index (to 428.90 from 450.90) was the biggest one-week drop since mid-January. The refinance index also dropped for the fourth week out of the last five to 1,731.60. That's the lowest level since the end of December.

Clearly, rising mortgage rates are starting to take their toll on mortgage demand. That will likely cause the housing market to downshift in June. The key question now is, where are rates headed next?

This weekly chart shows the yield on the 10-year Treasury Note. The blue line is a long-term downtrend in yields that dates back to late 1994. We broke above it several weeks ago, kept on going, pulled back, and are now "testing" that breakout point. If I'm right, and interest rates are still ultimately headed higher, this is as good a place as any for rates to make a stand. We'll see...