Wednesday, November 22, 2006

Mortgage applications up over the past month and mortgage rates down as well

Correction: Since there is a delay between when the mortgage applications report is released and when the Mortgage Bankers Association web site is updated, I inadvertently looked at the report from a week ago. There was in fact a decline in mortgage applications this past week, but the four-week moving average continued to move higher. This demonstrates that the numbers can be volatile even as there is a trend upwards.

Two interesting phenomena of the past month are that mortgage rates have actually declined and mortgage applications have actually risen. Applications for both refinancing and purchase have risen over that period (although applications fell in the most recent week.) A lot of the refinancing applications are conversions of adjustable rate mortgages to cheap fixed-rate mortgages, suggesting that the overhang of ARM mortgages that will "reset" next year will be less a danger than the doomsayers have been wildly claiming. The reports on applications and rates come out every week.

The raw fuel for financing mortgages is not money from the Fed or banks, but the vast excess liquidity of private investors (and public pensions) that is seeking even a modest return greater than safe Treasuries. A lot of this money continues to find the yield of mortgage-backed securities (MBS) reasonably attractive and low-risk. The low yield on the 10-year Treasury Note assures that an MBS yield will be attractive.

The housing market may continue to pull back for a few more months, but the bulk of the pullback is likely behind us. By spring (March to May), the housing market will probably be relatively stable, if not growing again.

-- Jack Krupansky

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