Wednesday, July 8, 2009

Mortgage application volumes back up - what does this mean?

As the 10-year Treasury falls, so too do mortgage rates. A simple linear regression of the 30-yr fixed conventional mortgage rate on the 10-yr Treasury and a constant has an R^2 = 0.97 - if Treasury yields fall another 20 bps (currently, they are 3.44%), the regression implies that mortgage rates would fall by 21 bps.

But what does this really mean for the recovery in housing? Mortgage rates, home values, and lending standards all explicitly or implicitly determine "affordability". Mortgage rates are again falling, and home values continue to decline. However, in looking at the volume of mortgage applications, purchase-only applications have been rather resilient to the recent uptick in mortgage rates.

The chart illustrates the 4-week moving average of the MBA mortgage application index and the 30-yr conventional mortgage rate. Mortgage rates have come down a bit, but the purchase only is plugging away in spite of the recent surge in mortgage rates.

Actually, the purchase only mortgage application index is very stable relative to the refinancing application volume index, with a relative volatility equal to 0.4 (relative volatility is measured as the standard deviation of the purchase-only index divided by the standard deviation of the total application volume index).

The chart illustrates the 4-week moving average of refinance application volume index and the 30-yr conventional mortgage rate. Refinancing activity (according to the mortgage application volume only) has come way off, down 74% since its local peak on April 17, 2009. However, application volume related to refinancing is extremely volatile, with a relative volatility equal to 5 (relative volatility is measured as the standard deviation of the purchase-only index divided by the standard deviation of the total application volume index).

In terms of stabilizing the housing market, the purchase-only measure, rather than the refinancing measure, is more important. As new home sales rise, the inventory can drop off faster. And since this measure is rather stable, I expect housing to continue to stabilize in spite of the volatility in the mortgage market. However, these are only mortgage application volumes, and loan standards will remain tight as labor market conditions continue to deteriorate.

In terms of the overall economy, refinancing activity can also be important for consumer spending. In the refinancing process, one effectively skips a payment during the month of closing. Therefore, that is added disposable income to the household that is refinancing.

Rebecca Wilder

2 comments:

  1. Don't re-fi's also help the economy by increasing monthly disposable (or savable) income and preventing bankruptcies?

    I want to see a graph showing bank compliance with the April 28, 2009 promulgation of the Making Home Affordable Program, the Parallel Second Lien Program. In particular: (a) What is the consumer success rate in refinancing second mortgages? (b) How many banks are offering 2nd mortgage re-fi's without being asked by the borrower?

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