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Average mortgage rates reported by Freddie Mac in its Primary Mortgage Market Survey fell for the week. The 30-year fixed-rate mortgage nearly returned to its 2012 weekly record low of 3.36 percent while the 15-year FRM set a new record low for the year at 2.66 percent.

Average mortgage rates have been steadily declining since the FOMC released its monetary stimulus action plan in mid-September. Since the FOMC's release, rates have fallen four out of the last five weeks.

The 30-year FRM reached a new record low of 3.36 percent on October 4, and this week was 1 basis point from that record low at 3.37 percent. The 15-year FRM set a new record low for the year at 2.66 percent, 3 basis points below its previous record low of 2.69 percent, also reported during the October 4 week.

Mortgage application activity for the week, however, did not increase with the lower rates. The Mortgage Bankers Association's Weekly Mortgage Applications Survey reported a 4.2 percent decrease in mortgage applications on a seasonally adjusted basis and a 14 percent decrease on an unadjusted basis.

Refinance applications were also lower for the week, decreasing 5 percent from the previous week. The decrease in refinance activity pushed the portion of applications attributed to refinancings down to 82 percent from 83 percent in the previous week.

The MBA's Purchase Index continued improving, adding 1 percent and matching its highest reading since June 2012.

In other real estate news for the week, housing construction reports continued to remain strong while existing-home sales fell slightly.

The National Association of Home Builders/Wells Fargo Housing Market Index increased to 41 from 40, returning to its June 2006 pre-crisis level. Builders surveyed, reported a 5 point increase in prospective buyer traffic, which led to the overall Index increase. Sales conditions and sales prospects, the remaining components deriving the Index's reading, were unchanged for the month.

Residential construction, reported by the Commerce Department, was also up in September. Single-family housing starts increased 11 percent in September, while privately owned housing starts improved 15 percent. Single-family building permit authorizations increased 6.7 percent and privately-owned authorizations increased 11.6 percent for the month. Housing completions for single-family homes were also up 8.5 percent and privately owned completions increased 0.4 percent.

Existing-home sales reported by the National Association of Realtors fell slightly for the month, decreasing 1.7 percent. Lawrence Yun, NAR Chief Economist, attributed the slowdown to tightened lending qualifications and inventory decreases.

"Despite occasional month-to-month setbacks, we're experiencing a genuine recovery," stated NAR's Chief Economist in comments on the September report. "More people are attempting to buy homes than are able to qualify for mortgages, and recent price increases are not deterring buyer interest," said Yun.

The NAR's September report stated a monthly inventory decrease of 3.3 percent and an annual decrease of 20 percent. The number of existing-homes for sale in September was 2.32 million. The inventory decrease brought the month's supply to 5.9.

Housing prices also appreciated in September, mainly attributed to the decreased inventory. According to the NAR, the median existing-home price increased to $183,900 in September, an 11.3 percent increase from September 2011.

September's decrease in existing-home sales and the lower mortgage application activity reported in October could signal a slowdown in the pace of the housing market recovery. Lenders appear to be tightening and potential homebuyers seem to be retreating, which could be a result of the economy's uncertain direction. If this trend continues through the remainder of the year, the housing market could potentially provide less stimulus for the U.S. economy than previously estimated, further adding to the constrained growth outlook for 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Mortgage Market Weekly Update: October 15 - 19, 2012