Record Low Mortgage Rates Bear Fruit

The latest mortgage activity report published by the Mortgage Bankers Association (MBA) this morning shows record low mortgage rates are making an impact. The MBA’s data indicates average contracted rates dropped across varying types of mortgage loans last week, driving a surge in refinance activity. Such a change, while occurring simultaneously with housing price rise, offers to lower the cost of housing on net for a great many people. The benefits of lowering the cost of living for Americans should theoretically include increased consumption and GDP growth. So hold the presses, this is really good news.

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The MBA reported that its Market Composite Index increased 16.6% on a seasonally adjusted basis in the week ending September 28. Despite being adjusted, we must note that such adjustment could be imperfect and may matter for the religious holiday filled month of September. That said, my feeling is that it did not likely make a significant impact. The unadjusted rate of increase was marked at 17% against the prior week.

Mortgage rates dropped by significant degree across the spectrum of mortgage loan types. This spurred the MBA’s Refinance Index higher by 20% to its highest level since April of 2009. It also drove the percentage of refinance activity up as a portion of total mortgage loan applications. Refinances made up 83% of all applications in the period, up from 81% the week before.

Loan Type	Average Rate	Change
30-Year Fixed Conforming	3.53%	-0.1%
30-Year Fixed Jumbo	3.82%	-0.05%
30-Year Fixed FHA Sponsored	3.37%	-0.07%
15-Year Fixed	2.9%	-0.08%
5/1 ARMS	2.59%	-0.02%

This is one of few times I believe this report should be supporting stocks broadly, but because of duration of the downturn, it is likely being mostly overlooked. Besides, as I’ve recently discussed, there is much weighing against stocks more broadly today. The SPDR S&P 500 (NYSE: SPY) was up by a half point at midday, but looks to be getting lift since the 10:00 AM reporting of the better than expected ISM Nonmanufacturing Index more so than this data. Still, the shares of major mortgage lenders including Bank of America (NYSE: BAC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and PHH Corp. (NYSE: PHH) were posting outsized gains of 0.8% to 2.5% through midday, so it appears the news was noticed by smart money.

Mortgage applications filed for home purchases also increased in the reported period. Both the MBA’s seasonally adjusted and the unadjusted Purchase Index increased 4% against the prior week. The index was also higher by 11% over the prior year period. Short-term changes in rates will have a less important impact on purchase activity, due to the relative illiquidity of the housing market and the time involved for the entire process, including decision making. That said, housing supply shortages are being reported in some regions now, and the surge of the publicly traded homebuilders has been well-noted. Lower rates can only help.

In the recent past, decreases in mortgage rates have had a subdued impact on housing and the cost of living, because a great many Americans purchased homes at the height of the housing boom from 2005 through 2007, and remain underwater today. However, if home prices continue to rise, an increasing number of homeowners will get their heads above water. This group of homeowners would benefit substantially from today’s record low rates, because the change incurred in their cost of homeownership and living could be substantial. Such change should also benefit the economy, since it would free up capital for consumption, investment and savings. Thus, it appears the Federal Reserve’s actions might finally bear significant fruit.

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