Mortgage Activity: Bad Sign For Housing?

by: Markos Kaminis

Mortgage activity dropped for the third straight week. Some are wondering if it’s a sign of economic deterioration, but there’s good enough reason to suspect a less meaningful explanation behind the drop-off. That said, housing is worth watching now, as lousy consumer sentiment and related paralysis could very well present yet another obstacle for real estate. We explore the constructive and obstructive factors to form our mosaic herein.

The Mortgage Bankers Association (MBA) reported on mortgage activity Wednesday for the week ending September 2nd. The MBA’s Market Composite Index, measuring general mortgage application volume, fell 4.9%, despite a drop in contracted mortgage rates.

The average contracted fixed rate 30-year and 15-year mortgage rate fell to 4.23% (from 4.32%) and 3.41% (from 3.49%), respectively. Even so, the MBA’s Refinance Index declined 6.3% from the previous week and basically drove the overall decline in mortgage activity. This is because the Purchase Index, which measures mortgage applications tied to the purchase of a home, rose 0.2% on a seasonally adjusted basis.

The illogical decline in mortgage activity can be easily explained by the period measured, which ended just a day before the start of the holiday weekend. This effectively negated at least a day (Friday) from the calculation, since prospective refinancers and home purchasers also take vacations over the Labor Day weekend. The adjustments that the measurers of economic data make to account for such events always take the holiday itself into account, but whether they properly account for the soft days of economic activity that precede and follow the holiday is another issue. For this reason, I think it’s best to keep from making economic forecasts around the period of these anomalies.

That said, I’ve recently documented the many signs of economic deterioration as seen in economic data reported over the last two months in my article, Dead Cat Recession Certainty. And even within this report, there is a bit worth noting. The four-week moving average of the seasonally adjusted Market Index is down 3.2%, with the Purchase Index off 3.7% and the Refinance Index short 3.1%. Since this figure is seasonally adjusted, it should account for a late summer lull in economic productivity and activity.

Thus, this may be yet another sign of economic softness in August, which could help put forth economic contraction in Q3. Real estate investors should note that the nascent economic bump in the road also presents a counterproductive catalyst to recently stabilized home pricing.

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