Buying a home is generally a person's single largest investment, and it is therefore an incredibly emotional decision. That may be part of why potential buyers pulled back last week, worried about rising interest rates and about what was behind big daily drops in the U.S. stock market.

Mortgage application volume fell 3.2 percent last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was 22 percent lower compared with the same week one year ago.

"Recent volatility in the financial markets and increasing rates continue to adversely impact mortgage application activity, even as the general economic outlook remains positive," said Joel Kan, an MBA economist. "Both home purchase and mortgage refinance applications decreased over the week, driven largely by declines in conventional applications."

Mortgage applications to purchase a home fell 2.3 percent for the week to the lowest level since February 2017. Purchase volume was 3 percent lower compared with a year ago. While tight supply of homes for sale had been plaguing buyers for much of this year, listings are increasing, but so are prices and interest rates, weakening affordability.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to 5.17 percent from 5.15 percent, with points increasing to 0.55 from 0.51 (including the origination fee) for loans with 20 percent down payments. That is the highest level since 2010.

Applications to refinance a home loan, which are highly rate sensitive, fell 4.3 percent for the week and were 40 percent lower compared with a year ago --- the lowest level in nearly 18 years. While homeowners now have more collective home equity than they ever have in history, thanks to higher home values, fewer are willing to tap that equity through a refinance, because it would require giving up their rock-bottom interest rate. Since rates sat so low for so long, there is a shrinking pool of borrowers who could now benefit from a refinance, cash-out or not.

Mortgage rates have not moved so far this week, as the bond market, which rates follow, was closed Monday for the Veteran's Day holiday. New economic data Wednesday on inflation and consumer prices could change that.

"If inflation comes in much stronger than expected, it should put noticeable upward pressure on rates," said Matthew Graham, chief operating officer of Mortgage News Daily. "Conversely, weaker inflation could help the recent trend of improvement continue, unless the stock market is staging a huge comeback for an unrelated reason."

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