The further drop in 30-year mortgage interest rates, to an 18-month low of 3.8%, is starting to be reflected in mortgage applications, according to Paul Diggle, property economist for Capital Economics.

Mortgage applications increased 1.3% from the previous week, continuing their upward trajectory for the fourth week, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending January 30, 2015.

He says that he believes refinancing activity is set for a sustained boom, while the lift to mortgage applications for home purchase should help spur higher levels of home sales this year. ?

“The MBA’s measure of 30-year mortgage interest rates fell 23 basis points to an average of 3.83% in January. Rates were as low as 3.79% in the final week of the month, and judging by the latest fall in 10-year Treasury yields they’ll reach 3.6% soon,” he says in a client note. “The all-time low for 30-year rates was 3.47% in December 2012, which coincided with 10-year Treasury yields that were just 10 basis points below the current level.” ?

Mortgage refinancing hit an 18-month high this week.

“We expect this is the start of a refinancing boom that will last for the first half of 2015 and see refinancing volumes rise by 200%. More refinancing will feed through into fewer mortgage delinquencies and stronger consumption growth,” he says. ?

Meanwhile, though, home purchase applications remain very subdued by historical standards, but he expects that this won’t stay the case.

“For one, mortgage credit conditions are loosening,” Diggle says. “In addition, job creation has shifted up a gear and stronger wage growth will soon follow. Finally, the survey evidence shows consumers are increasingly confident that this is a good time to make a home purchase.”