Weekly mortgage demand tanks 17%, after interest rates hit the highest level since August

Mortgage interest rates rose last week for the third straight week, hitting the highest level since August. That caused demand from both current homeowners and potential homebuyers to take a big step back. Total mortgage application volume fell 17% last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 6.52% from 6.36%, with points rising to 0.65 from 0.62 (including the origination fee) for loans with a 20% down payment.

Refinance demand, which is most sensitive to weekly rate moves, fell the hardest, down 26% week to week. It was still 111% higher, however, than the same week one year ago; rates at this time a year ago were 118 basis points higher, so anyone who bought a home last year could likely benefit from a refinance now. The refinance share of applications fell below 50% for the first time in over a month.

Applications for a mortgage to purchase a home fell 7% for the week but were 7% higher than the same week one year ago. More supply on the market now is opening up opportunities for some buyers.

"Demand is holding up to an extent for prospective first-time buyers. FHA purchase applications were little changed despite the increase in rates, as some first-time homebuyers remain in the market because of improving housing inventory conditions," said Joel Kan, an MBA economist, in a release.

Rates haven't done much to start this week, especially given the federal holiday Monday. The recent rise in mortgage rates may have slowed the resurgence in refinancing, but homebuyers may be less concerned about interest rates today and more concerned about the shape of the economy in the coming months. Some say they are holding off on making such a major purchase until after the November election.