Refis surge; Purchases not so much

The latest Mortgage Bankers Association figures show that lower interest rates continue to light a fire under the refinance market. Thanks to a drop in the average 30-year mortgage rate to 4.63% from 4.89%, the group's refinance application index jumped 41.5.% to 6,363.2 in the week of March 20 from 4,497.6 a week earlier. That was the third straight weekly gain and it leaves the refi index within spitting distance of its January 2009 high of 7,414.10. (The all-time high was 9,977.8 in the week of May 30, 2003).

But here's the thing: Plunging interest rates are still not having a huge impact on home purchase activity. While the purchase application index did rise, and is up three weeks in a row, the gains are much more muted than those we're seeing in the refi market. The purchase index gained just 4.2% to 267.8 in the week of March 20, despite the decline to a record low in mortgage rates. For some perspective, the all-time high for the purchase index was 529.3 the week of June 10, 2005.

The latest figures underscore the point I've made on many occasions: Refinancing when rates plunge is a no brainer, provided you're going to be in the property long enough to recoup your upfront costs. But a lot more than financing costs goes into the decision to buy a house. If people aren't confident in the future direction of home prices, or they're worried about their jobs, low interest may not be enough to get them off the fence. We will likely continue to see relatively muted activity in the housing market, and only a gradual recovery with time, despite the lowest mortgage rates in modern history.