Home loan demand falls despite rate plunge

Signs of a crumbling U.S. housing market and worries that the slump may hurt the overall economy are feeding the idea the Federal Reserve will be forced to trim short-term interest rates sooner than many had forecast.

The Federal Open Market Committee, the Fed's policy-making arm, last week voted to keep the overnight federal funds rate target at 5.25 percent for a second consecutive meeting. The central bank said it remained concerned about inflation, but acknowledged the risks to the growth outlook.

"Housing is certainly the big story here and I think disproportionately it's been a driver of growth on the upside and now on the downside," O'Sullivan said. "If the unemployment rate starts trending up, they clearly will start easing."

O'Sullivan expects the Fed to start lowering interest rates early next year.

MIXED SALES SIGNALS

The MBA's soft data preceded a separate report showing strength in the U.S. housing sector.

The Commerce Department on Wednesday said sales of new U.S. homes unexpectedly rose in August to a seasonally adjusted annualized rate of 1.050 million units after a sharp downward revision in July, while the inventory of homes for sale eased.

New single-family home sales increased 4.1 percent in August from a downwardly revised July rate of 1.009 million.

Despite the stronger-than-expected data, most contend the housing market is in a slump.

On Monday, the National Association of Realtors said the pace of existing home sales in the United States fell for a fifth straight month in August and prices dropped from year-ago levels for the first time in 11 years.