Mortgage Loan Applications Drop to Lowest Level In Years

Recovery, what recovery? Every recession since World War II has been led by the housing industry and to build those homes you have to have mortgage financing. So it should be said that economic recoveries are led by the real estate and mortgage industry.

The reason the real estate and mortgage industry always lead economic recoveries is that no other industry has the economic multiplier that the real estate and mortgage industry can provide. The economic multiplier for the real estate and mortgage industry is five (5). That means for every dollar spent building a home, it creates five dollars’ worth of economic growth.

In just the mortgage industry it is amazing how many people industries are involved in the entire mortgage process from start to finish. For example, there are over 40 different individuals that have some type of contact or input on each mortgage transaction. It’s probably three times that for building a home.

It’s just that no other industry can create so many jobs from one source, so as goes housing typically is how the economy goes.  That being said mortgage application volume is a good indicator of housing activity, and unfortunately that’s in a serious decline.  Here is what are friends from have to say about the most recent mortgage application report:
Mortgage application volume dropped 8.5%, on an adjusted basis, during the week ended Feb. 21, compared to the previous week, according to the survey.

On an unadjusted basis, volume decreased 7% compared with the previous week. It was the largest drop in weekly volume since the holiday season.

Refinance volume also fell 11% from the previous week. As a result, the refinance share of mortgage activity decreased to 58% of total applications, down from 61% the previous week.

The seasonally adjusted Purchase Index – a harbinger of incoming volume – decreased 4% from one week earlier. On an unadjusted basis, it increased 0.1% compared with the previous week and was 15% lower than the same week one year ago.

“Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” says Mike Fratantoni, chief economist for the MBA, in a statement.

The fact that interest rates and home prices keep rising isn’t helping the market either. For the week ended Feb. 21, the average rate for a 30-year fixed-rate mortgage (FRM) with conforming loan balance ($417,000 or less) was 4.53%, up from 4.50% the week prior.

The average rate for a 30-year FRM with jumbo loan balances (greater than $417,000) was 4.47%, up from 4.45%.

The average rate for a 30-year FRM backed by the Federal Housing Administration was 4.17%, up from 4.16% the week prior.

The average rate for a 15-year FRM was 3.56%, up from 3.55%.

The average rate for a 5/1 adjustable-rate mortgage (ARM) was 3.17%, down from 3.20%. The ARM share of mortgage activity remained unchanged at 8% of total applications.

All average rates included in the MBA’s report are based on closings.

Last week, the National Association of Realtors (NAR) released data showing that existing-home sales fell in January to the lowest level in a year-and-a-half.

As per NAR’s report, total existing-home sales, including single-family homes, townhouses, condominiums and co-ops, dropped 5.1% in January to a seasonally adjusted annual rate of 4.62 million – down from 4.87 million in December.

What’s more, home sales were 5.1% below the 4.87 million-unit pace recorded in January 2013.

Last month’s level of activity was the slowest since July 2012, when it stood at 4.59 million, NAR notes.

Lawrence Yun, chief economist for NAR, says, “Disruptive and prolonged winter weather patterns across the country are impacting a wide range of economic activity, and housing is no exception.”

“Some housing activity will be delayed until spring,” he says in the report. “At the same time, we can’t ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates. These issues will hinder home-sales activity until the positive factors of job growth and new supply from higher housing starts begin to make an impact.”

Steve Brown, president of NAR, points out that in addition to disruptive weather, higher flood insurance rates are impacting the market in areas designated as flood zones, which account for roughly 8% to 9% of sales.

“Thirty percent of transactions in flood zones were cancelled or delayed in January as a result of sharply higher flood insurance rates,” Brown says. “Since going into effect on Oct. 1, 2013, about 40,000 home sales were either delayed or canceled because of increases and confusion over significantly higher flood insurance rates. The volume could accelerate as the market picks up this spring.”

Out of all the factors slowing home sales, rising home prices and lack of affordability is perhaps having the greatest impact. According to NAR’s report, the median existing-home price for all housing types in January was $188,900, up 10.7% from January 2013.

This is particularly impacting first-time home buyers, who accounted for 26% of purchases in January, down from 27% in December and 30% in January 2013. NAR says this is the lowest market share for first-time buyers since it began monthly measuring the market in October 2008. Normally, first-time buyers should represent around 40% of home sales.

Despite the drop in purchase volume, inventories remain constrained, due mainly to the presence of all-cash buyers and investors, who are keeping home prices elevated.

Still, NAR’s report shows some easing of investor activity – which, in turn, is helping to boost inventory. Total housing inventory at the end of January rose 2.2% to 1.90 million existing homes – a 4.9-month supply at the current sales pace, up from 4.6 months in December. What’s more, unsold inventory is 7.3% above a year ago, when there was a 4.4-month supply.

According to NAR, all-cash sales comprised 33% of transactions in January, up from 32% in December and 28% in January 2013. Individual investors, who account for many cash sales, purchased 20% of homes in January, compared with 21% in December and 19% in January 2013. Seven out of 10 investors paid cash in January, NAR says.

Foreclosures and short sales accounted for 15% of January sales, NAR says, compared with 14% in December and 24% in January 2013.

About 11% of January sales were foreclosures, and 4% were short sales, according to NAR.

Foreclosures sold for an average discount of 16% below market value in January, while short sales were discounted 13%.

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