An Extraordinary Mortgage Applications Surge

|
Includes: BAC, ITIC, IYR, MTG, PHM, REM, SPY, XHB
by: Markos Kaminis

Summary

Mortgage application activity surged last week according to the latest data, even after seasonal adjustment to account for the holiday of the prior week.

However, in my experience following this data point, I've noted an anomaly around holidays and 3-day weekends that implies a less than perfect adjustment.

Thus, this week's extraordinary surge in mortgage activity should be considered just that, and not be relied on for capital allotment decision making.

Followers of mine know I have been bullish real estate for some time and that I remain so for 2016. But I cannot sit idly by and allow for misconception about an extraordinary mortgage applications surge. It is not representative of anything fundamentally extraordinary for real estate, but rather reflects an anomaly.

Over the last decade, as I've followed economic data points more closely, I've noted certain anomalies. There's one that applies to the weekly mortgage data that I want you to keep in mind moving forward. The Mortgage Bankers Association (MBA) reports its Weekly Applications Survey each Wednesday morning. This week's data measured the week ending January 8, notably comparing it to the week including the New Year's holiday and just after Christmas.

The report showed the MBA's Market Composite Index of overall mortgage application activity increased by 21.3% versus the holiday week. Does that seem at all strange to you? Ask yourself how much business you do during the week after Christmas and through New Year's Day. I doubt it is very much.

The MBA accounts for the holiday, adjusting the data, but even after the seasonal adjustment we have a huge increase in activity. On an unadjusted basis, the index increased by 76%, so clearly there is some accounting for the holiday. I believe the adjustment is imperfect, because it only accounts for the lack of a day due to the holiday, but does not account for the drop-off in activity on the day before and after a long weekend. I know there's an issue because I've followed the data point for years and have noted this occurrence without fail around holidays.

This year there is an extra problem. New procedures known as the Know Before You Owe Rules were implemented in the fourth quarter. These procedures require more paperwork and reading, and have extended the length of time between contract signings and closures. It appears they are impacting the mortgage application process as well, because the absolute value of the Market Composite Index reached high points this week and the week prior to the implementation of the rule. In the week before the rule was implemented, it looks to me like mortgage brokers simply pushed volume to avoid the new procedures. This week, I suspect the delayed process and the holiday combined to stack work up on some desks.

I do not believe there was a sudden burst of mortgage business in the first week of the new year, and I can say that confidently given my experience with the data. But let's look further to verify. Refinance activity increased 24% over the prior week, but refinance activity was down 38% against the prior year period. Why might refinance activity have increased week-to-week during a period of much less activity than the prior year, if not because of a measurement failure? Well, maybe if mortgage rates dropped substantially but were expected to bounce back we might see a sharp increase.

Mortgage Type

Rate

Weekly Change

Effective Change

30-year fixed rate w/ conforming balance

4.12%

-8 Basis Points

Decrease

30-year fixed rate w/ jumbo balance

4.02%

-7 BPs

Decrease

30-year fixed w/ FHA backing

3.9%

-5 BPs

Decrease

15-year fixed

3.42%

-5 BPs

Decrease

5/1 ARMS

3.14%

-5 BPs

Decrease

Click to enlarge

As it turns out, for average contracted mortgages, interest rates and effective rates decreased somewhat substantially last week. Also, given the outlook for the Federal Reserve's monetary policy, we might say there's an expectation for increase this year. I still do not think it was enough to move the dial so far for mortgage applications week-to-week.

Real Estate Relative Stocks

Wednesday Approx. 2:00 PM ET

SPDR S&P 500 (NYSE: SPY)

-1.5%

iShares US Real Estate (NYSE: IYR)

-0.1%

iShares Mortgage Real Estate Capped (NYSE: REM)

-2.2%

SPDR S&P Homebuilders (NYSE: XHB)

-2.7%

PulteGroup (NYSE: PHM)

-1.9%

MGIC Investment (NYSE: MTG)

-2.1%

Investors Title (NASDAQ: ITIC)

-0.0%

Bank of America (NYSE: BAC)

-2.1%

Click to enlarge

The good news did real estate relatives stocks absolutely no good today. For the most part, real estate relatives exceeded the decline of the S&P 500, at least up until my 2 PM measurement. Housing stocks are cyclical and tend to exaggerate market moves generally, but if the mortgage burst was truly significant, we might have expected some stubbornness in these shares. In the past, in the absence of significant market moves, reports like today's would tend to move the group (though wrongly). It seems the scare about oil is overbearing. Still, real estate sector investors should keep in mind that post-holiday mortgage data is not the sort you want to rely on before you put capital to use, or remove it from use. Next week's report might better represent the true state of affairs, but keep in mind this weekend is a 3-day weekend as well. I cover real estate regularly and invite relative interests to follow my column here at Seeking Alpha.

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

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.