Mortgage Applications Off 14.9%, but Don't Panic

The Mortgage Bankers Association (MBA) reported that weekly mortgage applications fell by 14.9% in the period ending October 14, but don’t panic. We believe we have got the reason for the drop pegged herein, and it’s a one-time event, so relax. If anything, the news out of housing has been positive this week, with Housing Starts reported up in September and the Housing Market Index also improved in October.

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Mortgage Applications Off

The MBA’s Market Composite Index collapsed by 14.9%, while the Refinance Index sank by 16.6%. The give-away data point, with regard to panic reconciliation, is the Purchase Index, which measures mortgage applications on home acquisitions. The seasonally adjusted Purchase Index also fell excessively, declining by 8.8% against the week just prior.

The naïve reader of the report might want to attribute the mortgage application decline to the increase in mortgage rates that occurred through the same period. The average contracted rates on 30-year fixed rate mortgages across the spectrum of jumbo, conforming and FHA sponsored loans all rose. FHA sponsored rates increased to 4.12% from 4.06%. So, we would expect some sort of drop-off in activity, but not the dramatic decline that actually occurred.

As I indicated previously, Purchase Activity is the giveaway. Everything around the purchase of a home moves slowly and takes time and consideration. So, we hardly ever see dramatic changes around mortgage applications for purchases. One might give the rate increase as much weight for driving activity as for cutting it off, since it might spur prospective buyers into acting out of fear that rates might go even higher. Therefore, the near 9 point drop in purchase activity last week cannot be a naturally driven circumstance. Well, no comet struck the earth (yet), and Europe is still solvent, so what was the driver. I believe that it was a factor I’ve pointed out before in this column, the effects of holidays on the data.

While some are better than others, data managers fail to perfectly adjust for holidays. Even if they’ve got the loss of the day perfectly accounted for, they tend to miss the drop-off in business activity that occurs before and after holidays, especially three-day weekends. As a result, though, I expect we’ll see a commensurate unnatural increase in activity next week, when the period matches up against the holiday burdened period. As always, I’m here to clear out the noise for you.

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