Refinance Applications Decrease
The rise in mortgage interest rates over the past several months is having a clear
impact on the mortgage side of the market.
The Market Composite Index (MCI), which is part of the Mortgage Bankers
Association’s (MBA) Weekly Mortgage Application Survey (in this case for the
week ending August 23, 2013) dropped 2.5 percent on a seasonally adjusted
average from the previous week. On an unadjusted basis the Index fell 3.0
percent for the same period. The MCI is a measure of mortgage loan application
volume that includes both purchase and refinance applications.
The Refinance Index fell by a full 5.0 percent from the previous week. The
Refinance Index has fallen 64.2 percent from its recent peak during the week of
May 3rd. The MBA data shows that the refinance share of mortgage activity has
decreased to 60 percent of total overall applications falling from 61 percent the
previous week, and is the lowest refinancing rate since April 2011. As recently
as May 1rst of 2013 mortgage refinances were 75 percent of total mortgage
In the week prior to August 23rd
(ending on August 16), overall mortgage
applications had fallen by 4.6 percent from a week earlier, with the Refinance
Index falling by a full 8.0 percent. With the increase in mortgage interest rates
from an historic low of 3.35 percent in early May to its current 4.8 percent on
conforming 30-year fixed-rate loans (loans of $417,000 or less), mortgage
refinance activity has continued to slow. Mortgage applications have now fallen
in fifteen of the past seventeen weeks, with decreased refinance activity leading
The seasonally adjusted Purchase Index increased by 2% from the previous
week. The unadjusted Purchase Index increased by 0.3% for the week and is up
about 6% year-over-year. Purchase applications remain higher than they were a
Recovery in Slowdown Mode?
On the surface most of the news coming from the real estate market indicates a
continued healthy recovery, but other indicators may give cause for concern.
According to the National Association of Realtors®, the national median existing-
home price rose in July by 13.7% over the same period one year ago, marking
17 consecutive months of year-over-year price increases.
Overall existing-home sales went up 6.5% in July, and were up 17.2% from the
same period in 2012. Existing-home sales have remained above year-ago levels
for 25 straight months.
Record low mortgage interest rates along with a limited home purchase inventory
caused a surge in home purchases and price increases.
However, in May when the Federal Reserve began talking about slowing an $85
billion per month asset purchase program interest rates went from 3.4% to 4.5%
within a month. According to the Mortgage Bankers Association current rates on
a 30-year fixed loan are 4.68%*. That jump has a huge impact on the
affordability of homes.
A $200,000 loan at 3.5% has a $898.09 monthly payment. At 4.5% it rises to
$1,013.37, and at 5.5% it is $1,135.58. The difference is considerable for
buyers. A 30-year mortgage at a 4.5% interest rate is 12.8% more expensive
than at 3.5%, and a jump to a 5.5% interest rate is an increase of 26.4%.
The result of the rising rates? The Mortgage Bankers Association says mortgage
applications have fallen week-over-week for 9 out of the last 10 weeks. The
association’s Refinancing Index is also down 62.1% from its peak during the
week of May 3. Also data from the U.S. Census Bureau shows that month-over-
month new single-family home sales for July dropped 13.4%. Both buyers and
refinaners are leaving the market.
The National Association of Home Builders Housing Opportunity Index shows
that “69.3 percent of new and existing homes sold between the beginning of April
and end of June were affordable to families earning the U.S. median income of
$64,400.” This is down from a 73.7% affordability rate in the first quarter, and the
first time that the measure has fallen below 70% since late 2008.
In the months to come look at these other economic indicators to see where the
market is headed; new home permits and housing starts, and pending home
*Rates change daily from state-to-state and lender-to-lender.
Pending Homes Sales Dip
Pending Home Sales for July dipped slightly with analysts blaming rising
mortgage interest rates; this according to the National Association of Realtors® (NAR).
The NAR’s Pending Home Sales Index (PHSI) declined 1.3 percent to 109.5 in
July from 110.9 in June. This is the second monthly PHSI decline in a row after
the index reached a six-year high in May when it hit 111.3. Though July’s
numbers were down from June, they are still 6.7 percent above July 2012 when it
was 102.6. Pending sales have now stayed above year-ago levels for 27
The Pending Home Sales Index is a leading indicator for the housing sector, data
is based on pending sales of existing homes. A sale is listed as “pending” when
the contract has been signed but the transaction has not closed. Sales are
usually finalized within one or two months of signing.
NAR chief economist Lawrence Yun, said, “The modest decline in sales is not
yet concerning, and contract activity remains elevated, with the South and
Midwest showing no measurable slowdown. However, higher mortgage interest
rates and rising home prices are impacting monthly contract activity in the
high-cost regions of the Northeast and the West. More homes clearly need to
be built in the West to relieve price pressure, or the region could soon face
pronounced affordability problems.”
By region the PHSI fell 6.5 percent in the Northeast dropping to 81.5, but is 3.3
percent higher than a year ago. In the Midwest the index slipped 1.0 percent to
113.2 in July but is 14.5 percent above year ago figures. In the South the PHSI
rose 2.6 percent to 121.5 for July and is 7.7 percent higher than a year ago. The
index in the West fell 4.9 percent in July to 108.6, and is 0.4 percent below July
Additionally the NAR is projecting “existing-home sales to increase 10 percent for
all of 2013, totaling about 5.1 million, and reach approximately 5.2 million next
year. With ongoing supply imbalances, the national median existing-home price
is expected to grow nearly 11 percent this year, and moderate to a gain of 5 to 6
percent in 2014.”
New-Home sales Fall
Data from the U.S. Census Bureau reveals that month-over-month new-home
sales fell sharply in July from the previous month, which is in contrast to the
increase in sales for existing-homes.
The Census Bureau data shows that new single-family home sales for July
dropped 13.4% month-over-month to a seasonally adjusted annual rate of
394,000, this compares to a downwardly revised June sales figure of 455,000.
However, year-over-year new-home sales have risen nearly 7 percent when
compared to July of 2012. The projected annual pace remains well below the
700,000 sales rate that is consistent with a healthy market.
These sales figures are also far below the peak rate set in 2005 when new-home
sales posted a seasonally adjusted annual rate of nearly 1.4 million. At the end
of July, the number of new homes for sale totaled 171,000, a supply of 5.2
months, up from a supply of 3.9 months at the end of June.
By contrast overall existing-home sales for all types of homes increased by 6.5
percent in July to 5.39 million units; this was up from June’s sales of 5.06 million
units. July’s existing-home sales figures were up 17.2 percent from 4.60 million
units in July of 2012. Existing-home sales have remained above year-ago levels
for 25 straight months, this according to the National Association of Realtors®.
All numbers are based on a seasonally adjusted annual rate.
Further data from the Census Bureau reveals that the median sales price for new
homes sold in July was $257,200; this was a slight 3% rise above the June
Associated Press Economics Writer, Christopher Rugaber, says, “The impact of
higher mortgage rates has surfaced in the new-home market faster because the
July sales report reflects signed contracts. Sales of previously occupied homes
reached a nearly four-year high last month. But that report measured completed
sales, which typically reflects mortgage rates locked in a month or two earlier.”
“The jump in previously occupied home sales likely reflected a rush by home
buyers to lock in lower rates. Some economists expect those sales to fall back in
Metro Housing Markets Improve
According to the National Association of Home Builders (NAHB)/First American
Improving Markets Index (IMI), a total of 247 metropolitan areas across 49 states
and the District of Columbia qualified for inclusion to the IMI list for the month of
The NAHB says that, “While this is eight metros shy of the number listed on the
IMI in July, it is approximately three times the number of metros that qualified for
the list in August of 2012.”
The IMI identifies metropolitan areas that have shown improvement from their
respective troughs. To qualify for the IMI list a metropolitan area must show
improvements for at least six consecutive months in regards to housing permits,
employment and home prices. Added to the list for August were Kankakee, Ill.,
along with Atlantic City and Ocean City, N.J. Eleven metro areas were dropped.
NAHB data shows that 244 metros that were listed as improving in July retained
that status in August. NAHB analysts see this an “encouraging sign of the
continuing housing recovery.” NAHB Chairman Rick Judson, however, explains
that “the pace of improvement is being hampered somewhat by challenges that
builders and buyers are experiencing with regard to the availability of credit,
materials, lots for development and labor.”
The NAHB noted that though there was a small decline in the IMI for August,
nearly 70 percent of all U.S. metropolitan areas are represented on the list, with
the geographic distribution of entrants continuing to be “very widespread.”
Reassuring news for prospective homebuyers, says the NAHB.
NAHB Chief Economist David Crowe stated that, “While the number of
improving housing markets this August remains well ahead of the same
month last year, the index is affected by seasonal softening in home prices
just as we saw happen in 2012. The metros that fell off the list this month
originally qualified with very small home price improvements that have
since slipped back. As house prices return to more normal levels in fully
recovered markets, further IMI advancements will be more modest.”
Housing Starts & Permits Rise
According to newly released figures from HUD and the U.S. Census Bureau,
housing starts nationwide rose 5.9 percent to a seasonally adjusted annual rate
of 896,000 units in July. Multifamily construction rebounded from a dip in the
previous month, while single-family construction recorded a modest decline from
a rate that was upwardly revised for the previous month.
Single-family housing starts showed a month-over-month decline of 2.2 percent
in July to a seasonally adjusted annual rate of 591,000 units falling from an
upwardly revised figure in June. The multifamily side of the market jumped a
substantial 26 percent to a 305,000-unit pace on a seasonally adjusted annual
basis; this was after having fallen by a similar amount in the previous month.
HUD/Census Bureau data shows that the issuance of building permits also rose
2.7 percent in July to a seasonally adjusted annual rate of 943,000 units. Building
permits are a forward-looking indicator in that they are projecting future building
activity. Again multifamily units led the way with an increase of 12.6 percent
representing 330,000 units. Single-family permits dipped slightly by 1.9 percent
to 613,000 units from a strong pace in the previous month.
By region, combined housing start activity posted strong gains of 40.2 percent in
the Northeast, 25.4 percent in the Midwest and 7.2 percent in the West in July,
while the South posted a decline of 7 percent.
The issuance of housing permits increased in every geographic region during the
month of July, with gains of 1.0 percent in the Northeast, 2.8 percent for the
Midwest, 1.1 percent in the South and 7.1 percent in the West.
Rick Judson, chairman of the National Association of Home Builders (NAHB),
said, “Builders are making every effort to keep up with the rising demand for new
homes and apartments, and construction in both sectors is running well ahead of
the pace we saw at this time last year. However, ongoing issues with accessing
credit and limited supplies of finished lots and labor are making it tough to do
that, particularly for single-family builders.”
According to RealtyTrac® (RT) its U.S. Foreclosure Market Report™ for July
2013, reveals that foreclosure filings increased 2 percent in July from the
For July foreclosure filings (which include default notices, scheduled auctions
and bank repossessions) were reported on 130,888 properties in the U.S. These
filings were a slight increase over June, which then was at a 78-month low, but
July’s numbers are still 32 percent lower than in July of 2012. The report also
shows one in every 1,001 U.S. housing units with a foreclosure filing during the
RT attributes the increase in foreclosure activity as being driven by a 6 percent
increase in monthly foreclosure starts along with a 4 percent increase in bank
repossessions (REOs). Both foreclosure starts and bank repossessions were
lower than one year ago.
Daren Blomquist, vice president of RealtyTrac, states that, “While foreclosures
are continuing to boil over in a select group of markets where state legislation
and court rulings kept a lid on foreclosure activity during the worst of the housing
crisis, the foreclosure boil-over markets are becoming fewer and farther between
as lenders have caught up with the backlog of delayed foreclosures in some of
the states with the more lengthy judicial foreclosure process.”
In spite of the slight increase last month U.S. foreclosure activity during July was
64 percent below the peak in March of 2010 when there were more than 367,000
properties with foreclosure filings. However, though current figures are well
below those seen at the peak in 2010, they are “still 54 percent above the
historical average of 85,000 properties with foreclosure filings per month before
the housing bubble burst in late 2006,” says Blomquist, and he adds that, “There
are a dozen states, however, where foreclosure activity levels in July were at or
below average monthly levels prior to the bubble bursting. Those states include
Texas, Colorado, Oklahoma, Indiana and Michigan, and we expect the number of
states in this category to increase in the coming months.”
Case Shiller Update (Pt 2)
As a continuation of the previous Case Shiller Update on home price
appreciation and real estate market conditions, analysts believe that conditions
are still good, but home price gains and sales will probably moderate over the
next year primarily due to the rise in mortgage interest rates.
Robert Shiller, Yale economics professor and co-creator of the Case Shiller
home price indexes said, “I think there is a risk of a softening housing market.”
Pointing out that the current home purchase environment has been a
“speculative market” with a large segment of buyers being investors that include
large Wall Street institutions, as well as small “house flippers.” Shiller noted that,
“rising rates will hurt home prices as the increasing cost of borrowing cuts into
In contrast to large investors, and according to the National Association of
Realtors®, first-time buyers, which normally account for at least for 40 percent of
the existing-home purchase market, are under-represented in the current
purchase market accounting for only 29 percent of purchases in July, and has
dropped further from 34 percent in July 2012.
David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices, in
commenting on the moderating home price gains, said, “With interest rates rising
to almost 4.6%, home buyers may be discouraged and sharp increases may be
“Other housing news is positive, but not as robust as last spring. Starts and
sales of new homes continue to lag the stronger pace set by existing homes.
Despite recent increases in mortgage interest rates, affordability is still good as
credit qualifications have eased somewhat.”
Market analysts expect that home price appreciation rates will slow over the next
year “as investors exit the market, mortgage interest rates rise, negative equity
falls, builders ramp up and more homes come on the market.”
Jed Kolko, chief economist at Trulia, notes that, “home prices are still low relative
to rents in every major city across the country: a 30-year fixed mortgage at a rate
of 4.5% with 20% down means it is still more than a third cheaper to buy a home
than rent one on average nationally” in the current market.
Case Shiller Update (Pt 1)
The latest data from the S&P/Case Shiller Home Price Index shows that home
price appreciation continues to rise, though the pace of growth is “beginning to
According to the Case Shiller data, U.S single-family home prices in 20
metropolitan areas rose a seasonally adjusted 0.9% in June, after rising 1% in
May. Though the index shows that all 20 cities posted gains on both a monthly
and annual basis, in only six of the cities were price gains rising faster in June
than they did in May. In May ten cities saw gains rising faster than the previous
Dallas and Denver reached new all-time highs, with returns of +1.7% each in
June. San Francisco had the largest jump, up 47.0% from its low in March 2009.
Phoenix wassecond, 37.1% above its September 2011 low. The Southwest and
California have consistently led the recovery with Las Vegas, Los Angeles,
Phoenix and San Francisco posting at least 15 months of gains.
The S&P Dow Jones Indices releases the Case-Shiller Home Price Index and
states that it is “the leading measure of U.S. home prices,” though the National
Association of Realtors® (NAR) has already released their home price data for
July, well ahead of this Case Shiller June data.
As noted, Case Shiller showed that overall prices continue to increase, with the
National Index growing 7.1% in the second quarter and 10.1% over the last four
quarters. Their 10-City and 20-City Composites posted returns of 2.2% for June
and 11.9% (10-City) and 12.1% (20-City) over 12 months.
David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices
states, “Overall, the report shows that housing prices are rising but the pace may
be slowing. As we are in the middle of a seasonal buying period, we should
expect to see the most gains. With interest rates rising to almost 4.6%, home
buyers may be discouraged and sharp increases may be dampened.”
Mortgage rates have risen more than a full percentage point since early May
when they were 3.4%. Interest on the 30-year fixed rate mortgage averaged
4.58% in the week ending August 22,according to Freddie Mac.
Buy or Sell NOW
Real Estate and Mortgage market analysts Jeff Brown, writing in The Street
(www.thestreet.com), tells both home buyers and sellers that now is the time to
take action for any home buying or selling, and to do so before the market
In truth, any urgency for action will fall directly in the lap of any potential
homebuyer, which we will see from Brown’s calculations below, but will not be a
pressing issue for sellers under current market conditions. Brown’s reason for
action…rising mortgage interest rates.
Indeed rising rates can make the cost of purchasing a home greater for the
buyer, thus potentially limiting the quality of the home acquired, or hindering the
purchase altogether. However, rising mortgage interest rates may slow the
current quantitative pattern of home price increases, but they are not likely to
stop the price jumps unless we’ve reached the top of the current market surge,
and there’s no indication that has occurred.
At present year-over-year national median existing-home prices have increased
by 13.7 percent with some metro markets seeing gains of over 20 percent.
Brown rightly notes that rising mortgage rates can negatively impact potential
buyers. He draws his figures from the Maximum Mortgage Calculator and looks
at the price/rate relationship. Rates have in fact nudged up again and Brown
points out that rates up to 6% are closer to normal market rates. He states:
“With the default inputs, a person with a $4,000 monthly income could afford a
monthly payment no higher than $805. That would support a $134,267 mortgage
at a 6% rate. Change the rate to 4.5%, about today’s level for the 30-year
fixed-rate loan, and the maximum mortgage jumps to $158,876.”
“So, if rates were to rise from today’s 4.5% to 6%, a level that has been common
in the past, this buyer would have $24,609 less to spend. Looked at another way,
a 1.5 point increase in mortgage rate would reduce this buyer’s buying power by
about 18%…note that raising the rate to 6% from 4.5% is a 33% increase,
producing a much larger monthly payment for a given loan size.” Rising home
prices and mortgage interest rates can most definitely impact potential home