Record Low Mortgage Rates - So What?

by: Markos Kaminis

Wednesday, the Mortgage Bankers Association (MBA) reported its Weekly Application Survey for the week ending July 6, 2012. The report measuring mortgage application activity was skewed by the July 4th holiday, but after adjustment, shows that even as rates dipped to the lowest on record, they did little to inspire mortgage activity. It's a sad situation when record low rates can't even draw business in a significant way.

Mortgage rates for contracted 30-year fixed rate mortgages with conforming loan balances ($417,500 or less) declined to 3.79%, from 3.86% the week before. Mortgage rates for contracted 30-year fixed rate mortgages with jumbo loan balances (greater than $417,500) eased to 4.05%, from 4.08%. Mortgage rates for contracted 30-year fixed rate mortgages backed by FHA fell to 3.63%, from 3.69%. Mortgage rates for contracted 15-year fixed rate mortgages decreased to 3.15%, down from 3.2% the week before. The average contract interest rate for 5/1 ARMS fell to 2.71%, from 2.76%. In each category, rates fell to their lowest in history, and the effective rates for each likewise declined; effective rates take points into account.

Mortgage activity should be booming at such rate levels, but the rate levels reflect the state of the real estate market, which remains soft. After adjustment for Independence Day, MBA tells us the Market Composite Index slipped 2.1%. If it's an accurate figure, it's also a sad one. The MBA's adjusted Purchase Index, reflecting mortgage applications tied to the purchase of homes, increased 3% against the prior week. The Refinance Index decreased 3%.

The July 4th holiday serves to skew the numbers in the reported period, and so I would take the adjusted results lightly as well. Instead, look to two weeks from now for a more reliable reading. The unadjusted raw data show the MBA's Market Composite Index of activity decreased 22% against the pre-holiday period.

The nation's most important mortgage originators should factor mortgage activity into their valuation in some degree or another, though the shares are moving today on the much more important FOMC catalyst. Still, in 2011 the largest originators were Wells Fargo (WFC), up 0.7% today, Bank of America (BAC) +1.9%, J.P. Morgan Chase (JPM) +1.0%, Citigroup (C) +0.1%, Ally, PHH Corp. (PHH) -2.0%, U.S. Bancorp (USB) +0.9%, Quicken, Flagstar Bancorp (FBC) +2.9%, and BB&T (BBT) +0.6%.

Yesterday, I suggested investors consider a short-term long trade in Citigroup, Bank of America and Morgan Stanley, on what I expected would be an FOMC catalyst. I said the shares were priced right for an upside move. By the looks of it, I was right, but it's time to close out the trade now.

Whether record low mortgage rates can inspire activity or not has everything to do with the economic direction, employment, and lending standards, all of which are working against real estate market recovery. So, even while the publicly traded builders are benefiting from market share gains, I do not favor them. Today, the shares of PulteGroup (PHM), Toll Brothers (TOL), D.R. Horton (DHI), K.B. Home (KBH), Beazer (BZH), Hovnanian (HOV) and Lennar (LEN) are all lower by large margin (1.8% to 4.5% lower).

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