Purchase Apps on 3-Week Winning Streak. Who Wants to Call a Bottom?

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending July 30, 2010. 

The MBA's loan application survey covers over 50% of all U.S. residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a snapshot view of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment. If consumers are able to reduce their monthly mortgage payment and increase disposable income through refinancing, it can be a positive for the economy as a whole (creates more consumer spending or allows debtors to pay down personal liabilities like credit cards). A falling trend of purchase applications indicates a decline in home buying demand, a negative for the housing industry and the economy as a whole.

Excerpts from the Release...

The Market Composite Index, a measure of mortgage loan application volume, increased 1.3 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 1.4 percent compared with the previous week. The four week moving average for the seasonally adjusted Market Index is up 0.3 percent.

The Refinance Index increased 1.3 percent from the previous week.  The four week moving average is up 0.2 percent for the Refinance Index. The refinance share of mortgage activity remained flat at 78.0 percent of total applications from the previous week.

The seasonally adjusted Purchase Index increased 1.5 percent from one week earlier.  The four week moving average is up 0.9 percent for the seasonally adjusted Purchase Index.

This third straight weekly increase in the Purchase Index was driven by government purchase applications which increased 3.4 percent from last week, while conventional purchase applications were essentially flat.  The unadjusted Purchase Index increased 1.5 percent compared with the previous week, was up 7.1 percent relative to four weeks ago, but was 33.7 percent lower than the same week one year ago.
 


The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.60 percent from 4.69 percent, with points increasing to 0.93 from 0.88 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  The effective rate also decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.03 percent from 4.12 percent, with points increasing to 1.01 from 0.83 (including the origination fee) for 80 percent LTV loans. This is the lowest 15-year contract rate ever recorded in the survey.  The effective rate also decreased from last week.

The average contract interest rate for one-year ARMs decreased to 7.10 percent from 7.15 percent, with points decreasing to 0.21 from 0.23 (including the origination fee) for 80 percent LTV loans. The adjustable-rate mortgage (ARM) share of activity decreased to 5.4 percent from 5.7 percent of total applications from the previous week.

Plain and Simple: Refinance demand continues to bolster the mortgage market as purchases account for only 22% of new loan apps. Home buyers are utilizing the FHA for low downpayment home financing. This is no surprise given the massive destruction of wealth that has occurred over the last two years. Although mortgage rates are hovering near record lows, and will likely hit new lows in the next release as more lenders are offering 4.25% on rate sheets this week, refinance demand just isn't what it was last spring. This proves the theory that the pool of qualified borrowers has shrunk right along with the industry, or is it the other way around?

HAS PURCHASE DEMAND HIT A BOTTOM YET?

It's still too soon to say, especially because it's supposed to be the summer buying season, but three consecutive weeks of index improvement is a start. We just have to hope purchase loan DENIALS don't rise right along with the increase in purchase loan demand. That whole qualification thing should raise doubts around any uptick in Pending Home Sales.