US mortgage applications rise as interest rates tumble

Source : Business Times – 16 Jul 2009

But demand for home purchase loans fell to lowest level since late-May

US mortgage applications rose for a second straight week, driven by a jump in demand for home refinancing loans as interest rates tumbled, data from an industry group showed yesterday.

However, demand for home purchase loans, an early indicator of home sales, fell to its lowest level since late-May.

The drop does not bode well for the hard-hit US housing market, which is plagued by a huge supply and demand imbalance amid mounting foreclosures.

The Mortgage Bankers Association (MBA) said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended July 10 increased 4.3 per cent to 514.4.

Diane M Ramirez, president of Halstead Property here, said confidence is the driving factor behind home sales and when interest rates on mortgages moved higher in late-May and early June it spooked some potential home buyers.

‘During that time we saw a noticeable drop in the number of people attending our open houses,’ she said.

‘It is all about confidence right now and not the level of interest rates on mortgages because, quite honestly, anything below 6 per cent is extremely attractive,’ she said.

Indeed, with the US unemployment rate at 9.5 per cent, its highest in nearly 26 years, many potential home buyers who have lost or who fear they may lose their jobs are opting to stay sidelined even though home affordability has improved significantly.

Borrowing costs on 30- year fixed-rate mortgages, excluding fees, averaged 5.05 per cent, down 0.29 percentage point from the previous week, the lowest since the week ended May 22, but higher than the all-time low of 4.61 per cent set in the week ended March 27. The survey has been conducted weekly since 1990.

Interest rates, however, were well below year-ago levels of 6.22 per cent.

Treasury yields, which are linked to mortgage rates, have fallen recently, with mortgage rates responding in kind.

Mortgage rates, however, remained above 5 per cent for a seventh straight week. Experts say mortgage rates at 5 per cent and below are what is necessary to make a significant impact on home loan demand.

The MBA’s seasonally adjusted purchase index fell 9.4 per cent to 258.8, the lowest reading since the week ended May 22.

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

Halstead’s Ms Ramirez said home owners seeking to refinance their existing home loans tend to react quickly to shifts in interest rates on mortgages.

‘When you are seeking to buy a home, it is not as much of a driving factor,’ she said.

The Mortgage Bankers seasonally adjusted index of refinancing applications increased 17.7 per cent to 2,009.4.

The refinance share of applications increased to 54.9 per cent from 48.4 per cent the previous week, but significantly lower than the peak of 85.3 per cent in the week ended Jan 9.

The adjustable-rate mortgage share of activity increased to 5 per cent in the latest week, up from 4.4 per cent the previous week.

The US housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as the rest of the world.

Economists contend that the economy might not emerge from its slump unless the housing market stabilises.

The housing sector, however, has been showing some signs of stabilisation, with sales rising and home price declines moderating in many regions of the country.

‘We are probably at or near a bottom in the Manhattan market,’ Ms Ramirez said. ‘It seems like the worst is behind it,’ she said.

The US government has embarked on an aggressive plan to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover.

The Federal Reserve has set a goal to buy up to US$1.25 trillion of agency MBS, US$300 billion of Treasuries and US$200 billion of agency debt in 2009. The purchases are part of efforts to lower borrowing costs.

Fixed 15-year mortgage rates averaged 4.59 per cent, down from 4.83 per cent the previous week. Rates on one-year ARMs decreased to 6.47 per cent from 6.58 per cent.