Mortgage Activity Misleads
The Mortgage Bankers Association (MBA) reported its Market Composite Index jumped 11.1% in the week ending September 7. However, the Labor Day weekend inclusive result contains risk of adjustment error. Thus, real estate enthusiasts would be wise to avoid reading too much into the latest result. This is well illustrated by the 12% decrease in the index when left unadjusted.
According to the MBA, the seasonally adjusted Purchase Index, which measures mortgage applications for home purchases, increased 8% week-to-week. However, the unadjusted version fell by more than 15%. Housing stocks are on fire, but it’s most likely due to the European crisis alleviation and anticipation of Federal Reserve help Thursday.
| Company & Ticker | Change at 2:15 PM |
| SPDR S&P Homebuilders (NYSE: XHB) | +1.6% |
| PulteGroup (NYSE: PHM) | +7.0% |
| Toll Brothers (NYSE: TOL) | +3.6% |
Mortgage rates eased in the period, after a recent stalling of a declining trend, perhaps leading those who had been waiting for another basis point to refinance. Mortgage rates on 30-year fixed rate FHA sponsored mortgages fell to a new survey low of 3.5% on average, down from 3.54% the week before. Average contracted rates fell across conforming loan balances, jumbo loan balances, 15-year mortgages and 5/1 ARMS.
The MBA’s Refinance Index, which is adjusted, increased 12% through the period. The MBA speculated that this might have benefited some from online mortgage application filing. As I said before, it also could have been driven by imperfect adjustment, or as implied above, by the drop in mortgage rates. Major mortgage lenders shares are mostly rising today, save Bank of America (BAC), though again more likely on the broader macroeconomic driver than on this data. Bank of America had started higher like the rest of the group, but I’m speculating it moved lower after a story was published indicating a change in management and possibly strategy was imminent.
| Company & Ticker | Change at 2:15 PM |
| Bank of America (NYSE: BAC) | -1.4% |
| Wells Fargo (NYSE: WFC) | +0.5% |
| Citigroup (NYSE: C) | +1.0% |
| J.P. Morgan Chase (NYSE: JPM) | +0.9% |
Real estate enthusiasts will probably be well served by approaching the market cautiously. While Fed action might further help mortgage rates, those gains would likely be on a diminishing scale. That’s because the issue for most American home shoppers is not rates. Rather, Americans are contending with higher scrutiny in qualifying for loans and other crisis created and economic related problems.
Moving forward, while the publicly traded builders continue to benefit from industry dynamics, global macroeconomic and other concerns still pose serious threat to undermine the chances of a robust and broad real estate recovery. That said, I see prices rising against an eventually weakening dollar, and view the current period right for home purchase. As for the publicly traded homebuilders, in the individual cases where market share gains and the benefits from multi-family construction continue to support operating results, the stocks might keep support until the midnight hour, unlike most other cyclical stocks.
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