Don’t look for any help to the economy from the housing markets.  Demand for mortgages hit a year-long low last week, dropping 18.6%, pushing the four-week moving average to almost -10%.  The silver lining was that the drop came more from refinancing applications than sales:

Mortgage applications tumbled to their lowest level in nearly a year as a six-week-long rise in interest rates took a significant toll on demand, an industry group said on Wednesday.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 17 decreased 18.6 percent, reaching its lowest level since the week ended January 1.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 9.8 percent.

Re-fi applications dropped 24.6%, hitting a low not seen since the end of April.  But purchase applications also fell, and the MBA’s purchase index dropped 2.5%, indicating that the housing markets are stuck in a generational trough.

A small part of the problem is an increase in rates for mortgages.  The pressure on interest rates comes from the rising cost of Treasury yields, which have risen in reaction to the Fed’s quantitative easing strategy.  The Treasury has to offer higher returns due to the dilution of the money supply created by QE2, which makes it more expensive for lenders to get the money to loan to customers.  Mortgage rates haven’t risen much, though; a 30-year fixed mortgage averages 4.85%, under the average rate this time last year of 4.92%, and up only 0.01% from the previous week.

The problem isn’t interest rates, or supply, which is in abundance.  The problem is demand and a lack of reliable valuation of current inventory.  Until employment increases substantially, we won’t see buyers entering the market in the kind of numbers needed to rescue the housing markets.  Until we see large numbers of people looking to buy and having the means to do so, valuation will still be difficult to determine and housing sales remain depressed.