Why The Lowest Mortgage Rates Of The Year Are Having No Effect

by: Markos Kaminis

The lowest mortgage rates of the year, as measured by the Mortgage Bankers Association (MBA), had no effect on mortgage activity last week. Neither did the previous lows, which were just marked the week before, play a positive role. Again in the latest week measured, ending December 16, rates declined to new 2011 lows, but both refinance activity and new home purchase activity declined. I know why.

In recent articles discussing the holiday shopping and employment statistics, I’ve outlined an important common denominator, which I see once again playing a role in the latest week’s mortgage activity data. It’s simple and it’s seasonal, but it’s not adequately accounted for.

When rates decline, you would expect mortgage activity to pick up, especially when mortgage rates reach new lows. That kind of decline should inspire some mortgage refinancing at least. Well it has not, and that is not completely due to the baggage of the real estate market collapse, including underwater mortgages and tighter bank lending rules and habits stretching across the most important lender, Bank of America (NYSE: BAC), through to the little lenders like Elmira Savings Bank (Nasdaq: ESBK).

Mortgage rates across all classes of mortgage loans fell to lows for 2011, based on the latest data found in the Weekly Application Survey. The average contracted rate for 30-year fixed rate mortgages with conforming loan balances ($417,500 or less) fell to 4.08%, from 4.12%. The average contracted rate for 30-year fixed rate mortgages with jumbo loan balances (over $417,500) eased to 4.44% from 4.47%. The average contracted interest rate for 30-year fixed rate mortgages backed by FHA fell to 3.93% from 3.94%.

Each of the week’s average contracted rates marked low points for the year. Yet, the Market Composite Index measuring mortgage applications declined 2.6% in the period. This had nothing to do with mortgage backed securities, and Goldman Sachs (NYSE: GS), Moody’s (NYSE: MCO), Fannie Mae (OTC: FNMA.OB) and Freddie Mac (OTC: FMCC.OB) are not to blame. Mortgage applications tied to the purchase of a home, measured by the Purchase Index, fell 4.9% on a seasonally adjusted basis. This was not due to scarce production by Hovnanian (NYSE: HOV) or Toll Brothers (NYSE: TOL). The Refinance Index dropped 1.6%, despite fresh incentive for many to find a cheaper cost of capital.

You’ll note the seasonal adjustment reported for the Purchase Index above. The unadjusted Purchase Index fell a much greater 7.5% against the prior week period. The all encompassing Market Composite Index saw a 2.8% unadjusted decline. To the undiscerning eye, this would seem to account for the holiday season well enough, but I continue to suggest it does not. These adjustments have fallen short in the past around three-day holiday weekends of all sorts. I believe the reason for it is because the adjustments seem to account for the day off only, and not the Tuesday that follows nor the Friday before the holiday. Each of those days sees less active levels of business.

I suggest economic data is failing again to account for the holidays. You see, Christmas is more than a day, and when accounting for the holiday, we must account for the entire week, or month depending on the term-being measured. All business activity shifts toward the consumption of goods from retail store outlets and other mediums of sale for gifting. People shop, and that’s about all they do. They are drawn in by the best discounts of the year and a guilty conscience that directs them to buy gifts for little Georgie and Jasmine. Just as they shop, they do not fire their employees, and so the latest unemployment benefits claims data are likely understating the true state of the labor market. Neither do people shop for a home or refinance their mortgage during this jolly good period, despite the best mortgage rates of the year. They are simply too busy shopping and baking and traveling and visiting with friends and relatives. In fact, they’re probably not even reading this critically important report.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.