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The Mortgage Bankers Association's index of weekly new mortgage applications is often a more useful gauge of the state of the housing market than the monthly new and existing home sales reports. This point was validated again this morning with the release of both the latest weekly MBA data and the 14.8% surge in new home sales for April.
While the overall index new mortgage apps rose 11.3% in the week of May 21, this was the noisy result of a 17% spike in the refinancing component (the direct beneficiary of the rally in the Treasury market and associated fall in mortgage rates); the key purchase component of the index fell 3.3%- following sharp declines in the prior two weeks- to its lowest level in 13 years.
Source: www.calculatedriskblog.com
The behavior of the purchase component recently highlights two important issues regarding the underlying dynamic in the housing market:
a) The expiration of the home-buying incentives in April has caused a sharp drop-off in the demand for homes in May. This suggests that, taking into account both the tax incentive-related spike in mortgage applications for purchases in April and the subsequent sharp decline so far in May, "true" demand remains essentially moribund during the key spring season. The most that can be said is that some kind of a bottom is being formed but with no credible signs of a turnaround yet.
b) Contrary to the popularly held belief, demand for housing is poorly correlated with the level of mortgage rates. The average 30-year mortgage rate declined again last week to 4.80% from 4.83% in the prior week (and over 5% in April). Still, as evidenced by the string of declines in the purchase component in the last few weeks, demand for homes has been unresponsive. In fact, it is a point often missed by analysts, that the collapse of the housing market since 2006 has been accompanied by a strong downtrend in mortgage rates.
The explanation for this seeming paradox is a fairly straightforward one: Demand for homes is above all a function of levels of employment and income growth and not mortgage rates- the latter representing a largely peripheral (and, at times, irrelevant) factor. Differently put, when people are unemployed, or seriously concerned about their job security, they will not undertake the major decision to buy a house simply because mortgage rates are low. Even a 1% mortgage rate would do nothing to make it plausible for an unemployed person to buy a home.
In fact, it is somewhat ironic, but analytically sound, to argue that demand for homes will only strengthen when the economic recovery has been meaningful enough over a longer period (2-3 years), as employment levels improve, wage gains increase and mortgage rates are on the rise.
In the current environment, with unemployment levels still very high, despite the unmistakable turnaround in underlying labor market conditions, households remain reluctant, or unable, to make the leap to by a home, irrespective of the historically low mortgage rates. Combining this dynamic with a still heavy inventory of unsold homes in most regions of the country, it is unlikely that any material turnaround in the housing market is in the offing over the next 6 to 12 months.
Anthony Karydakis
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