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August 15th, 2012

The Mortgage Bankers’ Association reported Wednesday that its mortgage market index fell 4.5% to 886.8. The purchase index slipped for a fifth straight week, this time by 2.0% to 175.9, the lowest since the February 24 week. This was only the third instance since 1999 that purchase applications were down for five consecutive weeks. The refinancing index declined by 5.1% to 5077.3, a 5-week low but only the second weekly drop. Meanwhile, National Association of Homebuilders’ Housing Market Index (HMI) showed that homebuilder sentiment staged another surprising advance in August, having risen two points from the prior month and nearly tripling in the last 14 months. The 12-month absolute change in index (+22) is the best improvement since 1992. Dealers detect conflicts between the higher-frequency MBA data and several other housing market anecdotes and they seem to side with those that signal strength.

Morgan Stanley Research noted the similar sized declines in the Conventional and Government spaces, where refi applications in the former were down 5.0% to 5172 and those in the latter were down 5.6% to 4591. MS submitted, “The decline in Conventional applications occurred despite mortgage rates staying unchanged from the previous week’s level. However, as we have noted in the past, a continual decline in loan size was indicating that refi applications may begin cresting at current mortgage rates. The decline in the Government index is a sign that the ‘FHA MHA’ surge is ebbing. However, the level of the index still remains elevated compared to its pre-‘FHA MHA’ program initiation steady state of ~3000, indicating continued interest in the program as well as a pickup in organic (i.e., rate driven) refi activity on low rates from that period.” Additionally, the moving average on Morgan Stanley’s Truly Refinanceable Index* is holding up well and is perhaps beckoning refi activity higher.

* The Truly Refinanceable Index is Morgan Stanley’s proprietary measure of the percentage of the mortgage universe that has the incentive and equity available to refinance. The measure incorporates current risk-based pricing adjustments.

Addressing the latest 5.1% drop in refi applications despite the 30-year mortgage interest rate remaining close to all-time lows (unchanged from the prior week’s 3.76%), strategists at Miller Tabak and Company commented, “This may just be the onset of the ‘dog days’ of summer, but the trend bears watching, as mortgage banks have put up very strong numbers in the past two quarters. We believe there is still plenty of “pent-up” demand among homeowners with above market interest rates and higher-than-necessary monthly mortgage payments, and home prices appear to have stabilized — all suggesting an embedded strong demand for refi.” Barclays Capital Research similarly wrote, “Despite recent deceleration in refi volumes, which are in part driven by tougher comps and mortgage market volatility, we do not believe that refis are at their saturation point. Overall, refi trends remain on the rise, representing an incremental positive for origination revenues.”

Keefe, Bruyette & Woods North America Research sounded similarly cautious. “While refi activity was down from its recent highs, the index remains elevated driven by the low rate environment and HARP volume. We continue to believe that mortgage industry capacity constraints are likely to result in mortgage volumes and refinance activity remaining relatively range-bound near current levels. We believe that this is positive for both mortgage originators and the title insurers (by extending the refinance wave) and for holders of Agency MBS (as it makes the prepayment activity more manageable).” Meanwhile, Keefe continues to expect “only modest improvement” in purchase activity this year and they added, “The high component of cash sales (approx. 30% according to National Association of Realtors) has created a disconnect between purchase activity and the MBA purchase index.”

Analysts at Raymond James U.S. Research said of the MBA purchase application index, “This data point is still heavily skewed to existing home sales, so it is not a complete surprise that homebuilders have reported materially stronger new home orders than recent trends in this index would suggest. Nevertheless, despite the generally positive news about the nascent housing recovery, the MBA purchase index has been relatively flat over the past few months and remains down 9.2% y/y. This surprising disconnect, in our view, is likely a function of how strong the surge of investor capital into single-family housing has been this year. These all-cash investors have made it difficult for mortgage-dependent buyers to compete, thus driving many to the less-competitive and repair-free new home market. In hard-hit markets like Las Vegas and Phoenix, where the discount to replacement cost remains a key attraction, dozens of prospective cash buyers are competing daily for an increasingly limited supply of foreclosure inventory and short sale listings.” Following the release of the NAHB data, Raymond James analysts remarked, “Overall, we believe falling existing home inventory levels, low mortgage rates, and rising buyer confidence are creating positive momentum for the builders in desirable submarkets. Despite growing evidence of a strengthening housing recovery, we would highlight that several key headwinds remain. Most notably, stringent underwriting standards continue to plague prospective buyers, and lending banks continue to deal with a growing number of legacy put-back requests and an uncertain regulatory environment.”

UBS Investment Research seemed unworried about the steady slide in the purchase index. “Despite the decline, the 4-week moving average has remained relatively range bound over the past few months. That said, our channel checks indicate a seasonal moderation in demand as we move through the summer. Further, we believe the index has been a less reliable gauge of sales recently due to differing conditions in the new versus existing home markets and a lower number of applications per sale.”

RBC Capital Markets Economics Research took the more skeptical view. “It is interesting that homebuilder confidence (hope) continues to print fresh cycle highs even as mortgage purchase applications (actual activity) have shown no signs of life. Purchase apps are down five weeks in a row now and have fallen -14% from the nearby high in June. The disconnect between perception and reality continues to widen when it comes to the housing market.”

Dealers agree that falling mortgage interest rates have diminishing returns on purchase and refinancing applications. The steady drift in purchase apps, however, may be inconsistent with other housing market indicators, including home sales, median prices, residential construction employment and builder optimism. It could well be that homebuilder sentiment is instead running ahead of other realities. It’s also important to keep in mind that, despite a dramatic improvement in the HMI over the past 14 months, the majority of homebuilders remains pessimistic. Dealers are similarly circumspect about a genuine housing-led economic recovery.


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