Even with mortgage rates at the lowest level in three months, homebuyers are pulling away from the housing market.

Mortgage application volume fell 5.8 percent last week from the previous week, according to the Mortgage Bankers Association's seasonally adjusted report. Volume was 17 percent lower than a year ago.

Purchase volume drove the decline, falling 7 percent for the week, although it was 2 percent higher year over year. Buyers are still challenged by high prices and higher mortgage rates, and now some are clearly concerned about the steep drop in the stock market.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) decreased to its lowest level since September, 4.94 percent, from 4.96 percent, with points decreasing to 0.43 from 0.48 (including the origination fee) for loans with a 20 percent down payment. The recent drop in rates has not helped affordability much, as rates are still three-quarters of a percentage point higher now a year ago.

"More potential borrowers likely stayed away because of ongoing financial market volatility and economic uncertainty," said Joel Kan, MBA's associate vice president of economic and industry forecasting.

Applications to refinance a home loan also fell, down 2 percent for the week and 33 percent from last year. Most borrowers have already refinanced to rock-bottom rates, and those who haven't may be hoping that rates will fall further, given the downturn in financial markets. The average balance for refinance loans increased to its highest level since September 2017.

"With rates continuing to slide lower, refinance borrowers with larger loan balances seemed more apt to take action," added Kan.

The refinance share of mortgage activity increased to 43.5 percent of total applications, its highest level since February, from 41.5 percent the previous week.

Mortgage rates slid further to start this week, but all eyes are now on the Federal Reserve, which will make its next rate announcement Wednesday afternoon.

"We could see plenty of volatility for rates," said Matthew Graham, chief operating officer at Mortgage News Daily. "A strong move in one direction or the other could even set the tone for the next two weeks."