Weekly mortgage applications plummeted to a four-year low last week despite recent positive reads on the market.
Total applications fell 5.9 percent week-to-week on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA). Applications to refinance also fell, extending the dramatic fall that started with last summer’s mortgage rate hike; they are off nearly 74 percent from a year ago.
“Refinance activity continued to slide despite a 30-year fixed rate that was unchanged from the previous week. The refinance index dropped 7 percent to the lowest level since 2008, continuing the declining trend that we have seen since May 2013,” said Michael Fratantoni, chief economist for the MBA.
Applications to purchase a home, which fell four percent on week, are perhaps more telling of the housing market’s current state. These applications, which generally mirror pending home sales – signed contracts to purchase homes – are down 21 percent on year.
Pending home sales were slightly higher in March from February, according to a report released by the National Association of Realtors earlier this week, but analysts surveying activity on the ground have warned that April sales could be slower. The mortgage application numbers would appear to confirm that.
“Purchase application volume remains weak, despite other data which indicate that the overall pace of economic growth is picking up. The combination of higher rates, new regulations and tight inventory all are leading to a weaker spring market than we have seen in years,” said Fratantoni.
Inventory remains tight because builders are still operating at anemic volumes, while millions of home owners are trapped owing more on their mortgages than their homes are worth. Other homeowners don’t have enough home equity to afford a move-up home. These potential sellers have no option but to sit the market out.
The mortgage news comes on the heels of a quarterly report showing that not only did the U.S. home ownership rate fall to the lowest level in 19 years, but the vast majority of the newly formed households are renter households.
“All of our new households are renters and they aren’t transitioning into ownership because of high prices in many metros, tight credit, high student debt and low rental affordability which makes it difficult to save for a down payment,” said Stan Humphries, chief economist at Zillow, a real estate website. “Over the past decade, the pace of rent increases has been double the growth in incomes. You don’t have to be an economist to see a problem there.”
Meanwhile, home prices continue to make strong gains, with the latest readings showing anywhere from 7 to 13 percent annual appreciation. While home prices are still at least 10 percent below their peak in 2006, the credit market today makes that price differential substantially larger.
Home prices were able to soar to their 2006 highs because buyers didn’t need much, if any, cash to buy a home. No-down-payment loans with short-term teaser rates made home purchases easy. Home prices were artificially inflated by cheap and easy credit. As we know, that model was unsustainable.
Today, credit is much tighter. It’s therefore incorrect to compare today’s prices to those of the housing boom because home buyers now need to make larger down payments and pay the market rate on a 30-year fixed loan or an adjustable rate loan right from the start. They may also be subject to mortgage insurance premiums, which are higher at the FHA, the government’s mortgage insurer that was initially created for lower credit-worthy borrowers with lower down payments. In the case of adjustable rate loans, borrowers must prove an ability to afford the loan once rates adjust higher, thanks to new lending rules, deemed, “ability to repay.”
Home price gains are still a function of a housing market driven by a historically-high share of all-cash investors. While investors are slowing some of their purchasing, more than one third of all home sales today are made in cash. Much of the sales activity is now on the higher end of the market, as the crucial first-time buyer continues to be squeezed out. While home values may be recovering, the health of the overall housing market is not.
—By CNBC’s Diana Olick