Mortgage Purchase Applications Point To Renewed Housing Bear Market

Includes: DHI, KBH, REM, RYL
by: Dave Kranzler

The latest Mortgage Bankers Association weekly mortgage applications report released this morning (Wednesday) further confirms my view - as expressed in several previous Seeking Alpha articles - that the housing bear market that began in mid-2005 will resume in 2014. For purposes of my analysis, I look only at the "mortgage purchase" data, as this is the relevant metric that would apply to both new and existing home sales.

Today's report showed a 1% drop from the previous week. The purchase index has now fallen in 10 of the last 14 weeks. What makes this trend statistically significant is that the week to week numbers are "seasonally adjusted." This means that statistical estimates are applied to the actual data in order to modify the data so that - at least theoretically - week to week data can be compared on an "apples to apples" basis.

As you can see from this graph (sourced from the Calculated Risk blog, edits in black are mine), not only is the year over year seasonally adjusted 4-week moving average down roughly 16% from a year ago but, more troubling, it looks like the current down-trend could be accelerating:

Click to enlarge

Even more bearish is that (from the link at the top) the year over year actual data shows an outright 20% drop in purchase applications. If this were a stock or market index, analysts would be proclaiming a "bear market" in purchase applications.

The weather cannot be blamed for this drop for two reasons. First, the MBA data is for the week ending Friday, January 3rd. The arctic weather did not hit most of the country until that night. Furthermore, purchase applications occur after contracts are signed, which means that data through last week would have correlated with contract signings earlier in the week or from the previous week. My point is that the year over year actual data is going to be statistically significant for comparison and analysis.

This mortgage purchase application data and trendline is very bearish for the housing market. It means that the brief sales "bounce" of the last 18-24 months is likely over and the market will once again head lower.

Some might argue that existing home sales statistics show a greater percentage of all-cash home purchases over the last several quarters and thus the mortgage data is not as relevant. While this is true, it has been the "buy-to-rent" investor who has been doing most of the all-cash buying. There have been several recent reports which show that not only have big investors dramatically slowed down purchases, but some are actually unloading some of their housing portfolios.

In addition, as detailed in a previous housing market article, more than 91% of new home buyers use a mortgage and that percentage increased slightly in Q3. The purchase application data imply that new homes sales reports will continue to show decline in sales. Furthermore, it is the non-investor "organic" home buyer using a mortgage which makes up the majority of all home sales. As the big investor retreats from buying homes, if the organic buyer does not step in and fill the sales void the housing market will fall off a cliff.

One last point on the significance of the recent trend in mortgage purchase applications. As I detailed in my recent article on November's pending home sales index, a negative trend in home sale contract signings has developed. To the extent that less contracts are being signed, and a lot less purchase applications are being filed, reported home sales for at least the next few months, will show a decline.

I continue to believe, based on careful dissection of reported data, that the housing market is going to shock the market to the downside. Please see my past articles for the basis of this view and for ideas to take advantage of this view. My two current plays are my short positions in DR Horton (NYSE:DHI) and KB Homes (NYSE:KBH). I added to both in the last two weeks. I also happened to notice that several Ryland insiders (NYSE:RYL) have dumped twelve times more shares than they have purchased in the last year. If these insiders had a bullish view on the market and their stock, why are they selling at this rate?

Disclosure: I am short DHI, KBH, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.