All eyes are on housing supply and purchase applications data

All parties in the housing industry are examining the latest data since the sharp increase in mortgage rates.  Industry experts, CEO’s, and Banks are all giving their opinion on what the impact of the best increase in mortgage rates since 1987 will do the market.  However, this is just guess work and housing data will be used to gauge the impact of mortgage rates.  Two of the most important figures are the housing supply and number of purchase applications, basic supply and demand measurements.

Housing sees a slight slowdown as inventory grows

There is has been a 20% spike in home prices over the last six months and as the housing supply has increased during the same period. A lot of sellers are taking advantage of the increase in price to list their homes.  However to counter balance this increase, there has been a new loan modification programs available to allow underwater home owners an almost automatic application into the program.  Also, states like California have passed stricter guidelines on foreclosure (like dual track) greatly suppressed the REO market.  This has kept the growth of house supply in check and contributed to the increase in home values by only marginally increasing supply.

Mortgage applications fall 11.7% as rates keep rising

Mortgage applications plummeted 11.7% from a week earlier as the industry continued to panic over the Fed’s future involvement in the mortgage bond market.

The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan balance continued its climb to 4.58% from 4.46% a week earlier, reaching the highest it’s been since July 2011, the Mortgage Bankers Association reported.

Meanwhile, refinance applications posted a heavy drop as well, tumbling 16% to the lowest level since 2011.

The purchase index ticked back down 3% after a slight increase last week.

In light of the hike in mortgage rates and a dip in refi applications, refinancing activity fell to 64% of total applications: the lowest level since May 2011.

“Mortgage rates reached their highest point in two years last week. At these rates, many fewer homeowners have an incentive to refinance, and refinance application volume declined more than 15%,” said Mike Fratantoni, MBA’s vice president of research and economics.

He added, “With this decline in volume, the refinance share dropped to its lowest level in more than two years. Purchase application volume also declined, but not nearly to the same extent, as affordability remains strong.” 

The 30-year, FRM jumbo increased to 4.68% from 4.52% a week earlier, which is the highest rate since October 2011.

Hitting the highest rate since September 2011, the average 30-year, FRM backed by the FHA escalated to 4.27% from 4.20%.

The 15-year, FRM also grew to 3.64% from 3.55%, while the 5/1 ARM inched up to 3.33% from 3.06, both reaching their highest level since July of 2011.

Now, on the demand side, the market continues its long slow multi-year decline in purchase applications.  Of, course cash buyers/investors have been filling that gap left out by normal buyers.  Lately, investors too have been slowing down their purchases.  So, you have slow down in demand by both investors and principal residence buyers.

The huge unknown is the buying patterns of the investors, there isn’t a “cash only application” that can be tracked as easily as home purchases.  In a couple of weeks and months when closed sales are available the true drop in investor purchases will be known.  With mortgage rates getting close to the 5% market again on, I’m sure this is having a negative impact on investor buying as investors will have to sell their home to buyers with 15% less purchasing power since May 1st.  That is extremely short period of time to have such an increase in mortgage rates.

Here some comments on volatility.  It’s no longer just the low mortgage rates investors must factor on the purchase their investment property.  The investor is probably aware that this sharp increase in mortgages can happen again, so now volatility is also a factor.  This might prevent them from purchasing homes that are riskier.

The supply and demand dynamic of the previous six months have been altered.  We just don’t know the extent of the change.  Also, banks have controlled housing supply very well, if they maintain this control we might see tightening of the supply.  I’m fairly certain the buying demand has decreased from both investor, flippers, and principal residence buyers.  We just need to know if is it small incremental change in supply and demand or if some more significant event has happened.