Economist's Commentary: March 26, 2008
A Cautious Read on Mortgage Applications
By Lawrence Yun, Chief Economist
The Mortgage Bankers Association, which produces mortgage application trends on a weekly basis, reported a surge in applications in the latest week. Mortgages for home purchases rose 11 percent while that for refinances leapt 82 percent from the week before. The data are seasonally adjusted so the increase would be in addition to any normal seasonal rising trend. The increase is certainly welcomed – in light of positive numbers on recent existing homes sales – but the mortgage figures should be read with caution.
The strong surge in refinances implies more people are getting a better deal and some people are getting out of those risky subprime loans. For many, the financial gains from refinancing are likely to be substantially higher than the tax rebate checks people will soon be receiving. That is, Bernanke “refinance” checks are higher than Bush “tax rebate” checks.
The rise in mortgage applications for home purchases further hints at a possible end to the housing downward cycle. Although applying for a mortgage is not the same thing as an approval for a mortgage, generally home sales activity follows in the same direction as mortgage purchase applications. However, the relationship is not one-to-one. Historically, there has been an upward drift to mortgage purchase applications. From 1990 to 2007, mortgage purchase applications rose by 386 percent. Over the same period, the combined new and existing home sales rose by only 66 percent.
The two series were particularly off track in 2007 when mortgage applications rose while home sales slid. Last year was unusual because the credit crunch in the second half of the year forced many people to apply at multiple institutions in the hopes of getting one approval.
With these caveats in mind, today’s rise in mortgage purchase applications is still good news. (Compared to a year ago, applications are down by only 2 percent, whereas existing home sales were down by more than 20 percent in February from a year ago). If nothing else, these numbers reflect a healthy interest in homeownership, also apparent in the significant increase in foot traffic reported at open houses in recent weeks. As I have said many times, there is significant pent-up demand, yet people have been hesitant about purchasing a home due to the fear factor and not purely due to lack of financial means. With falling home prices in some parts of the country and historically low mortgage rates, some would-be buyers are thinking hard about owning a piece of America. Flickers of light at the end of the housing market tunnel are becoming visible.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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