New Mortgage Data: The Market Is Deadlier Than Ever

| About: iShares Residential (REZ)

There are many data points used and misused by bulls and bears to determine the health of the housing sector and the companies in that sector – home builders, suppliers and so on. For investors who passed third grade math, this is a sector shun, no, run away from. For traders looking for shorter term headlines, the best data point is the mortgage application data from the Mortgage Bankers Association.

This morning’s data testified to how moribund the housing market is at this time.

Mortgage volume decreased decreased 10.5% (seasonally adjusted) compared to last week. The Refinance Index decreased 11.2%, the Purchase Index decreased 6.7 percent and more importantly is 29.4% lower than this time last year during one of the home buyer tax credit booms. The four week moving average for the Purchase Index is down 1.1%. The ratio of refinancings to new mortgages is still about four to one with refinancings running at 82.4% of mortgage applications.

Bottom line: the foreclosure mess and the coming uptick in unemployment is slowing down interest in buying homes. Traders take note – there is little good news coming from this sector in the foreseeable future.

For investors, none of this is a surprise. Using simple math and public data on late payments, defaults, pending foreclosures, active foreclosures, housing inventory and credit standards the housing sector will not see a price bottom until mid 2013 at the earliest. This means 2014 will be the first time there is an opportunity for a modest uptick in demand and 2015-2016 before excess foreclosed inventory is off the market. That is not a good timeline for home builders, who are also facing decreased margins. The builders will also face higher interest rates sometime and many have ugly balance sheets.

Disclosure: None