Interest Rate Roundup

Wednesday, July 01, 2009

Mortgage demand hits 7-month low despite drop in rates. Here's why ...

Mortgage applications dropped sharply in the week of June 26. The Mortgage Bankers Association's application index (chart above) plunged 18.9% to 444.8, the lowest level since late November. The refinance index tanked 30%, while the purchase index slipped 4.5%. This occurred despite the fact mortgage rates dropped for the third week (to 5.34% from a recent high of 5.57%).

This fits with what I've been telling various questioners: While 30-year rates in the mid-5s are low on a LONG-TERM historical basis, they're not very low relative to the last five or six years. The average since mid-2003 (when we had the last mega-boom in refis) is 6%, according to Freddie Mac. So the universe of mortgages that can be refinanced on a "rate and term" basis isn't very large in the mid-5s. And of course, the "cash out" refi business is dead in the water. That's because A) falling home values have made it so fewer people have any equity to cash out and B) lenders are much tougher on LTV ratios in the cash out business these days.

We're going to need to see rates head back into the 4s to get the mortgage train rolling again. That's unlikely to happen unless the economy deteriorates sharply, nascent inflation concerns cool, and/or the government regains control of its out-of-control finances (something that would help attract investors to long-term bonds again). That's a tall order, from where I sit.


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