Mortgages and Home Sales: Is a Larger Home Price Drop Coming?

Econintersect: Mortgage applications decreased 4.0% week-over-week for the week ending May 27, 2011. The housing market may be running out of buyers despite the low mortgage rates.

Econintersect has consistently warned that mortgage applications are no longer predicitive of home sales as over 1/3 of the current home purchases are not financed.  Real time home price data provider, Altos Research, has good news and bad news:

It’s nice to be able to be contrarian AND bullish for once. The real-time data is up. Demand is responding to the low interest rates and years of falling prices. There are deals to be had. And, ironically, despite all the shadow inventory that might come on the market, if you’re buying a home right now, in most places you’ll notice that there aren’t all that many actually on the market for you to choose from! These are bullish, short-term factors for housing. They’re the reason home prices have rebounded since March.

Longer-term, though, the signals are weaker. The economy appears to be slowing again, the cheap-money lifejacket appears to be reaching saturation. The conventional wisdom that home-ownership-is-necessary-for-wealth is shifting. Meanwhile keep an eye on the real-time data and stay out of the rearview mirror.

According to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey, on an unadjusted basis, the Index decreased 4.2 percent compared with the previous week.

“Interest rates fell last week as incoming economic data was weaker than anticipated. Despite this drop in rates, the number of refinance applications fell. In fact, the last time mortgage rates were this low, refinance volume was more than twenty percent higher. It is likely that many borrowers still cannot qualify to refinance given the lack of equity in their homes,” said Mike Fratantoni, MBA’s Vice President of Research and Economics.

The refinance share of mortgage activity decreased to 65.7 percent of total applications from 66.8 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.2 percent from 5.8 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.58 percent from 4.69 percent, with points increasing to 1.01 from 0.69 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The 30-year rate is the lowest since November 2010. The effective rate also decreased from last week.

Sources:  Altos Research,  Calculated Risk and MBA