Home Sales, Mortgage Applications Feel Holiday Lull

For the week ending Dec. 22, mortgage application volume slimmed down and new home sales remained virtually flat

Mortgage application activity faltered last week as rates edged up and holiday duties rose to the tops of priority lists, according to a report issued Wednesday by the Mortgage Bankers Assn. For the critical retail week ending Dec. 22, the MBA's Market Composite Index, a measure of mortgage loan appreciation volume, decreased 14.2% to 555.8 on a seasonally-adjusted basis from 647.6 the week ending Dec. 15. On an unadjusted basis, the index was up 16.6% year-over-year.

In the same period, the Refinance Index pulled back 18.5% to 1604.6 from 1968.8 the previous week, but the level remained 41.6% higher than it was in the same week one year ago. In the first week of December, the Refinance Index hit 2304.4, the highest level since Sept. 2005.

The seasonally-adjusted Purchase Index decreased 10.6% to 390.2 from 436.5 one week earlier, but its unadjusted value of 289.8 was more or less unchanged from one year ago, when it was 290.2.

Also during the week before Christmas, the refinance share of mortgage activity slipped to 48.8% of total applications from 50.8% the previous week. The adjustable-rate mortgage (ARM) share of activity fell to 23.1% from 23.6% of total applications one week earlier, hitting its lowest level since October, 2003.

Shift in Focus

A minor rebound in mortgage rates had some negative effect on applications, but the holiday week, during which consumers tend to visit malls more than mortgage lenders, can be difficult to interpret statistically. "A holiday week may distort the true trend in terms of applications," notes Greg McBride, senior financial analyst at Bankrate.com. "People were focused on holiday shopping, upcoming travel, and family get-togethers—not on their mortgages."

It was, in fact, evidence of robust retail activity that fueled the recent rise in mortgage rates as early reports of strong sales dashed hopes of an imminent Federal rate cut. However, a more recent report from MasterCard's SpendingPulse revealed that holiday sales jumped just 3% this season compared to the 2005 season, when sales jumped 5.2% (see BusinessWeek.com, 12/26/06, "A Ho-Hum Holiday for Retailers").

For the week ending Dec. 22, the average contract interest rate for 30-year fixed-rate mortgages moved to 6.12% from 6.10% a week earlier, while the average one-year adjustable mortgage rate inched up to 5.87% from 5.82%. The average 15-year fixed-rate mortgage, a popular choice for refinancing, rose to 5.84% from 5.82%.

"Mortgage rates are still very low," says McBride, noting the tiny 0.02 to 0.05 point rate increases over the previous week. Fixed-mortgage rates in particular have been significantly lower since the U.S. Federal Reserve stopped raising interest rates at mid-year. In late June, the average 30-year fixed mortgage rate was 6.93%, and the average monthly payment on a loan of $165,000 was $1,090. With the current average 30-year fixed rate of 6.2%, the same loan originated now would carry a monthly payment of $1,002.

Sleepy Season

Relatively low lending rates, along with falling home prices, have restarted demand in the past two months, but the latest figures on new home sales indicate that a housing-correction bottom remains out of sight.

In a Wednesday report, the U.S. Census Bureau said sales of new single-family homes in November edged up 3.4% to a seasonally-adjusted annual rate of 1.047 million from a rate of 1.013 million in October. The report's confidence interval, however, was 12.9—placing the November percent increase well within the margin of error.

"There's no smoking gun," says Raemeka Mayo, a survey statistician with the Census Bureau, pointing out that new home sales also increased 3.1% in September before dropping to a record low in October.

Moreover, adds Mayo, on an unadjusted basis, new home sales actually declined 7.7% in November to 72,000, from 78,000 in October. Sales of new homes are down 15% year-over-year. Wednesday's report revealed some signs of stabilization—the median price of a new home rose 5.8% in November to $251,700 from $237,900 a year earlier, marking the biggest year-over-year increase since June.

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