Purchase volume dropped 5.7 percent and is at its lowest point since February 1997 as refinance mortgage application fell 14.3 percent. Overall mortgage applications dropped by 12.2 percent during the week ending June 4, compared with the previous week.

"Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April," said Michael Fratantoni, MBA's vice president of research and economics.

The average interest rate on a 30-year, fixed-rate mortgage fell to 4.81 percent last week from 4.83 percent a week earlier.

The average rate for a 15-year, fixed-rate mortgage which is often more popular for refinancing a mortgage increased to 4.26 percent from 4.24 percent.