A key measure of home-purchase applications surged last week as mortgage rates dropped to the lowest level in more than a year.

The Mortgage Bankers Association's (MBA) index of mortgage applications jumped 6.9% for the week ended Aug. 2, according to new data published Wednesday. At the same time, the average rate on the popular 30-year loan dropped to 6.55% last week from 6.82%. It marked the lowest level for interest rates since May 2023.

"Mortgage rates decreased across the board last week," said Joel Kan, MBA's deputy chief economist. He said the decline follows "doveish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected."

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Homes in Centreville, Maryland, on April 4, 2023. (Nathan Howard/Bloomberg via Getty Images / Getty Images)

The drop in rates also fueled a surge in refinancing applications, which rose 16% for the week and were 59% higher than the same week one year ago. 

Refinancing allows homeowners to essentially take out a brand-new loan on their property, which is typically used to pay off the original mortgage. It can offer several benefits, including a lower interest rate, a lower monthly payment or a shorter loan life.

Rising home values can give homeowners the opportunity to refinance on more favorable terms. Persistently high mortgage rates, however, have discouraged many homeowners to refinance recently.

Currently, about 80% of mortgage holders have a rate below 5%, according to a Zillow survey.

Homes in Hercules, California, on Aug. 16, 2023. (David Paul Morris/Bloomberg via Getty Images / Getty Images)

Despite falling mortgage rates, purchase applications remained subdued last week. Applications for a mortgage to purchase a home rose just 1% for the week, and are 11% lower than they were last year.

"Despite the downward movement in rates, purchase activity only saw small gains," Kan said. "For-sale inventory is beginning to increase gradually in some parts of the country, and homebuyers might be biding their time to enter the market given the prospect of lower rates."

Higher mortgage rates over the past three years have created a "golden handcuff" effect in the housing market. Sellers who locked in a record-low mortgage rate of 3% or less during the pandemic began have been reluctant to sell, limiting supply further and leaving few options for eager would-be buyers.

Economists predict that mortgage rates will remain elevated for most of 2024 and that they will only begin to fall once the Federal Reserve starts cutting rates. Even then, rates are unlikely to return to the lows seen during the pandemic.