Why Housing Looks A Little Rickety

Hopes that the worst of the housing slowdown has already come and gone may be dimming. Mortgage rates stopped marching higher during recent weeks, and home sales, after tumbling this winter, appeared to stabilize this spring. But recent data indicate further weakening is yet to come.

The weekly snapshot of lending activity by the Mortgage Bankers Assn. (MBA) not only includes figures on mortgage applications to buy homes but also on the average size of the loans being sought. Both measures are seen as timely indicators of the housing market and both, after leveling off during the spring, are plunging once again.

Based on monthly averages, mortgage applications are now falling at the fastest pace since 1995. In July they were down 15.1%. The Aug. 9 update showed the weakness continued into August.

Smaller Mortgages Suggest Lower Prices
Moreover, the deterioration in the pool of interested home buyers is forcing sellers to further lower their price expectations. The average mortgage loan size is now smaller than it was a year ago, off by 0.5% from last July. This suggests further weakness in home prices because "average loan size is a reasonable coincident or slightly leading indicator of home price inflation," Goldman Sachs (GS ) economist Jan Hatzius says in an Aug. 2 research note.

There are other reasons to expect that prices will keep softening. The national vacancy rate of homeowner housing hit a record high of 2.2% in the second quarter. The higher vacancy rate was most likely driven by the rising inventory of new homes for sale. In June, the level of completed new homes on the market swelled by 28.2% from a year ago. Rising inventories and weak pricing are significant reasons why homebuilders have become increasingly pessimistic.

Housing may catch a break with the Federal Reserve finally holding interest rates steady at 5.25% on Aug. 8. Mortgage rates should keep hovering around the current 6.6% level. However, economists are not convinced that the Fed is finished tightening. Further rate hikes could push more potential home buyers away, striking another blow to an already vulnerable market.

By James Mehring in New York

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