Seasonal influences are still at play in the weekly mortgage application data produced by the Mortgage Bankers Association (MBA), but soon, we should see real improvement. That said, the latest reported increase is no reason to get giddy about a real estate recovery.
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No Reason to Rally
Over the course of the last several weeks, we’ve continuously pointed out the seasonal noise we see in the data produced within many economic metrics. One of the data points we’ve keyed on has been the MBA’s Weekly Applications Survey. Activity dropped off significantly in the weeks of December, as Americans were too busy shopping, preparing their homes, visiting with friends, baking and cooking to spend time applying for a mortgage. Even despite the lowest mortgage rates of the year, they kept from refinancing, and certainly there were some refinancing opportunities created by those historical troughs.
However, now that we’re fully immersed in 2012, the data should begin to reflect economic value adding opportunities like those offered in the mortgage market. The latest period, reported today, still included the New Year’s Day holiday, and so is not clean of noise. For the week ended January 6, though, the MBA’s Market Composite Index (of mortgage activity) picked up 4.5% on a seasonally adjusted basis.
Besides discussing the seasonal influences on data in recent weeks, we’ve also discussed the imperfect work of seasonal adjustment, especially in dynamic periods like the current times. You can see just how hard it must be to make this adjustment based on historical data by simply looking at the unadjusted change, which this week marked a 34.4% increase against the week just prior.
We’ve noted that three-day holidays likely give adjusters a problem because they fail to fully account for the soft business activity that occurs the day before the weekend begins and the day after the holiday. There is certainly a slacking of business activity during those crossover periods as people prepare for the holiday and also return from a tiring or relaxing weekend and reenter into “work mode.”
Alas, all that noise will be going away over the weeks ahead, and the market should begin to take advantage of low mortgage rates, though depending upon weather now. Many strategists, economists and housing specialists are pointing to a true spring selling season this year, given supply rundown and employment improvement (so called). I’m a skeptic with regard to labor, again due to seasonal ringers in the data and other issues described in my labor market work.
Rounding out the most recent week’s data for financial sector and housing enthusiasts, the seasonally adjusted Purchase Index increased 8.1%. Remember, the Purchase Index measures activity tied to the purchase of a home. Homebuilder investors will likely add this news to their lists of reasons to rally the industry’s shares, but it’s not a solid data point to build on in that regard. Filling in the rest of the data, the unadjusted Purchase Index increased 41.9%. The MBA’s Refinance Index increased 3.3% from the week before.
Take note now, dear smoke and mirror crew, because what is useful here is the year-to-year comparisons. In that regard, the Purchase Index was severely lower against the prior year period, down 17.9%. That doesn’t sound like a reason to buy homebuilders to me, but you won’t find that information in the current frenzied flurry of news on the industry, except from me. I’ll have more to say on the homebuilders specifically in the near future, so stay tuned.
Homebuilders are up again today despite insight like this, with the SPDR S&P Homebuilders (NYSE: XHB) up 1.4% in late afternoon trading Wednesday. The shares of K.B. Home (NYSE: KBH) and Hovnanian (NYSE: HOV) are up near 13% on the day, with shares of Lennar (NYSE: LEN) up 6.1% partly on its own news. Financials are not missing a beat either, with big home financer Bank of America (NYSE: BAC) up 3.3% and the Financial Select Sector SPDR (NYSE: XLF) up 0.8%.
Be warned though, because the latest days' rise has been driven more by greed than by reason, in my view. Don't label me as a perennial pessimist though, because I suggested investors get into homebuilders last year. I see the latest move as indicative of subtle signs for housing, ample hope for investor profit and complete ignorance of the importance of Europe to the U.S. economy and the growth of emerging markets.
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