Demand for mortgage loans increased last week as a troubling economic outlook led to a decline in rates, according to the Mortgage Bankers Association (MBA).

The market composite index, a measure of mortgage loan application volume, increased 1.15% for the week ending July 29, after falling for four consecutive weeks to the lowest level in more than two decades. 

The refinance index rose 1.45% last week compared to the previous week. Meanwhile, the purchase index grew 0.97% in the same period. 

However, compared to one year ago, borrower demand is weak. The MBA data indicates that, in comparison to the same week in 2021, the market index fell 62%. The refi index was down 82.6% in the same period, and the purchase index was 15.8% than this time last year.

“Mortgage rates declined last week following another announcement of tighter monetary policy from the Federal Reserve, with the likelihood of more rate hikes to come,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement. “Treasury yields dropped as a result, as investors continue to expect a weaker macroeconomic environment in the coming months.”

The Fed raised the federal funds rate by another 75 basis points, to 2.25%-2.50%, on July 27, bringing more concerns about a recession in the U.S. economy. 

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Consequently, purchase mortgage rates dropped to 5.30% last week, from 5.54% in the previous week, according to the PMMS survey from Freddie Mac. 

The MBA’s estimate also shows that rates are falling. The average contract 30-year fixed-rate mortgage for conforming loans ($647,200 or less) decreased to 5.43%, from the previous week’s 5.74%, the largest weekly decline since 2020. Jumbo mortgage loans (greater than $647,200) went from 5.32% to 5.06% in the same period. 

“Lower mortgage rates, combined with signs of more inventory coming to the market, could lead to a rebound in purchase activity,” Kan said. 

According to the Black Knight’s monthly mortgage monitor report, June had the record-low home price appreciation and the largest single-month increase of for-sale inventory in 12 years, showing a cool down in the housing market. 

The MBA data shows the refinance share of all mortgage activity remained almost the same, from 30.7% the previous week to 30.8% of total applications this week. 

The Federal Housing Administration’s (FHA) share of total applications fell 11.9% from the previous week’s 12.1%. The Veterans Affairs’s (V.A.) share of applications increased to 10.8%, from 10.6% and the United States Department of Agriculture’s (USDA) share held steady at 0.6%. 

The share of adjustable-rate mortgages (ARM) applications declined from 9.1% to 8.4%. According to the MBA, the average interest rate for a 5/1 ARM decreased to 4.55% from 4.67% a week prior. 

The survey, conducted weekly since 1990, covers 75% of all U.S. retail, residential mortgage applications.