A terrible trend continued through the latest mortgage activity data, with mortgage application flow hemorrhaging now on a determined rise in mortgage rates. It's a trend that has run for over a month now and is finally being noticed by the popular press and major media, and hopefully by the Federal Reserve. Expectations of higher rates are undermining the Federal Reserve's best efforts for real estate, and there seems to be no end in sight, though I have an idea to offer that should instantaneously resolve the situation.
30-Yr. Fixed Conforming
30-Yr. Fixed Jumbo
30-Yr. Fixed FHA
The mortgage rate trend is absolutely disturbing, and it is having real impact on mortgage activity for more than just the refinancing market. Purchase activity is also on the decline, and that is terrifying for the real estate recovery.
The Mortgage Bankers Association (MBA) reports that for the week ending May 31, its Market Composite Index of mortgage activity collapsed by 11.5%, and that's after several prior weeks of deterioration. The Refinance Index, which measures mortgage applications for refis, is obviously vulnerable given the circumstances. It fell another 15% last week to its lowest level since November 2011! The refinancing share of mortgage activity dropped precipitously this week, to 68% of total applications, from 71% just a week prior. That marks its lowest point since July 2011.
What's most disturbing to real estate investors though is what is happening in the market for home purchases. The seasonally adjusted Purchase Index fell 2% this week, but it was down 13% on an unadjusted basis. There's a good reason for the difference. The activity decline is doubly concerning because we are now leaving the spring, the most active period for home purchases, and entering the lazy days of summer. If potential homebuyers put off home acquisitions for better days, they may never see those, and a slew of potential home purchases could be lost this year as a result.
This issue has had a profound impact on stocks in the real estate sector, and has effectively challenged valuations that have gone unchallenged for quite some time. Note the broad financial sector has held its ground due to the broad benefits it gains from rising long-term interest rates on expanding net interest margins. Still, investors in major mortgage lenders like Bank of America (BAC) should be including a housing stall now in their scenario analysis.
iShares Dow Jones US Real Estate (IYR)
Vanguard REIT Index (VNQ)
SPDR Homebuilders (XHB)
iShares FTSE NAREIT Mortgage REITs Index (REM)
Financial Select Sector SPDR (XLF)
The problem is largely the result of market expectations for higher interest rates. Though, I believe these expectations have been built upon a faulty perspective of economic health and recovery, and also on a nascent expectation for Federal Reserve tapering of its asset purchase program. The market is even speculating that Fed interest hikes might not be too far off, due to recently poor communication by the Fed.
Given the truth about the economy, expressed again today in the latest ADP Private Employment Report, and regularly in data I've been noting for readers of my column, the solution for this problem is evident. If the Federal Reserve does not want to derail the real estate recovery, it must clearly state that a tapering of its asset purchase program is not imminent, and that it continues to view support for the real estate market as needed. I will be following this trend and the real estate market as closely as ever, so interested parties are hereby invited to follow along with my column.