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Be afraid, be very afraid… The latest Weekly Applications Survey from the Mortgage Bankers Association (MBA) showed that a rise in mortgage rates across most mortgage loan types coincided with a big drop in mortgage activity. I think that is just terrifying, and so should you.

The MBA data showed that for the week ending May 10 its Market Composite Index of overall mortgage activity decreased by 7.3%. It was just a week after climbing higher by a similar amount, but there was no holiday playing havoc with the data like often occurs. So what did change then? Well, mortgage rates jumped up significantly for most loan types, except FHA-backed loans, because points were significantly lower for FHA loans last week.

Loan Type

Rate Change

Effective Rate Change

Conforming Balance 30-Yr. Fixed

+8 Basis Points

Increased

Jumbo Balance 30-Year Fixed

+8 BPS

Increased

FHA Sponsored 30-Year Fixed

+8 BPS

Decreased

15-Year Fixed Mortgage

+7 BPS

Increased

5/1 ARMS

+2 BPS

Increased

As you might have expected, the MBA's Refinance Index dropped 8% on the change in rates. The refinance share of mortgage activity still held at 76%, but for a bad reason. Because as refinancing activity declined, so did mortgage activity tied to the purchases of homes. As such, the MBA's Purchase Index dropped 4% from the prior week.

This might have been part of the reason homebuilder stocks declined on Wednesday even as the Housing Market Index, which measures builder sentiment, improved. The shares of homebuilders PulteGroup (PHM), Toll Brothers (TOL), and Hovnanian (HOV) fell on the day as seen in the chart below:

Chart forPulteGroup, Inc.

Source: Yahoo Finance.

The shares of major mortgage lenders, Bank of America (BAC) and Citigroup (C), still rose on the day as soft economic data was nullified by increased trader speculation about more Federal Reserve easing. That's another thing I'm terrified about, but that will be the topic of another article, so stay tuned.

Conclusion

If mortgage activity is that sensitive to mortgage rates, despite the extremely low level of rates today, then we should be very afraid. It means there's very little economic support for housing activity beyond rates. That is no surprise for readers of this column who are aware of the massive number of undocumented unemployed Americans out there. It's no surprise for those following along as we bring attention to deteriorating economic data week after week. But knowing a monster is coming does not make it any less frightening; in fact, it builds anxiety.

Source: Be Very Afraid: Higher Rates Killed Mortgage Activity