Consumers saw an opportunity last week and took it — in a big way.

Mortgage rates dropped to their lowest level in nearly two years, so total mortgage applications surged 26.8% in just one week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was 41% higher than a year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) decreased to 4.12% from 4.23%, with points remaining unchanged at 0.33 (including the origination fee) for loans with a 20% down payment. That rate was 4.83% a year ago, 71 basis points higher.

"Mortgage rates for all loan types fell by a sizable margin for the second straight week, pulled down by trade tensions with China and Mexico, the financial markets reacting to more bearish communication from several Fed officials, and weaker than expected hiring in May," said Joel Kan, MBA's associate vice president of economic and industry forecasting.

Refinances, which are most rate-sensitive, led the surge, jumping a remarkable 47% week to week and 97% annually. That pushed the refinance share of total mortgage application volume to 49.8% from 42.2%. It is nothing short of a refinancing boom, with applications now up 63% in the four weeks as rates have fallen 28 basis points over that time.

Mortgage applications to purchase a home, which hadn't gained much traction on falling rates, finally jumped 10% weekly and annually. Buyers don't usually react immediately to weekly rate drops, but since rates have been falling for a few weeks now, it may have pushed more potential buyers off the fence.

"Demand is still relatively strong, but there is likely some restraint from prospective buyers, driven by some economic uncertainty. Furthermore, housing supply is still very tight for first-time buyers," Kan said.

Supply is rising in most metropolitan markets, but only in the move-up and luxury range. Starter homes continue to be scarce, and builders are still mostly building more expensive homes. Housing starts overall have been falling, as builders saw very weak demand at the end of last year and are only now seeing that demand pick up.

Will rates stay this low or move even lower? Impossible to predict, but there are definite signals.

"We're in a consolidation phase now where markets are coming to terms with the longer-term move lower that began in late 2018," said Matthew Graham, chief operating officer of Mortgage News Daily. "The next move will depend on how economic data evolves and whether there are any more trade policy bombshells."