Mortgage Application Relief Post Sandy

The Mortgage Bankers Association (MBA) today reported that mortgage application volume increased substantially, but for what reason. Well, there appear to be two, one important economic driver and another extraordinary catalyst. Rates declined through the week ending November 9, offering an important driver for activity. However, the passing of Hurricane Sandy seems to have led to pent-up demand in the highly populated Northeast, which unraveled last week and skewed the data.

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The MBA’s Market Composite Index increased by 12.6% against the immediately preceding week. Growth had balanced support between refinancing activity and mortgage applications on the purchases of homes. The Purchase Index, which measures applications filed for home purchases, increased 11% against the prior week on a seasonally adjusted basis. The Refinance Index likewise rose, increasing by 13% in the reported period.

We can look to mortgage rate activity for a catalyst for refinancing, as effective rates decreased across the range of mortgage loan types. Conforming loan mortgage rates for 30-year fixed rate mortgages even set a new record, falling to 3.52% from 3.61% in the prior week. The average contracted rates for each type of mortgage loan balance follow below. However, in some cases the change was not substantial. There certainly seems to be another catalyst, as further evidenced by a change in trend. This was the first increase in the Refinance Index in 6 weeks.

Loan Type	Rate & Change
30-Yr. Conforming Balance	3.52% (down 9 Basis Points)
30-Yr. Jumbo Loan	3.83% (down 5 BPs)
30-Yr. FHA Sponsored	3.34% (down 3 BPs)
15-Yr. Fixed	2.88% (down 7 BPs)
5/1 ARMS	2.6% (down 1 BPs)

The other catalyst is clear, and it will be affecting economic data for a good time forward, as monthly reports begin to reach the wire for the relative period. It was Hurricane Sandy and the storm’s stifling of business activity. The seasonally adjusted Purchase Index improved by 11%, and the unadjusted measure rose by 8%, obviously adjusted for the storm. The MBA, in my observation, has been imperfect in its seasonal adjustments, and seems to have also understated the impact of the storm here.

On a year-over-year basis, the Purchase Index was 22% higher than the same week a year prior. Obviously, the housing market is healthier this year than last, and some of that improvement is reflected here, but we might look to data from weeks prior to see how the year-to-year difference differs. In this report from October 3rd, we see that in a period of rate driven gains, the year-to-year improvement in the Purchase Index was just +11% versus this week’s +22% increase. I think this comparison clearly exposes the Hurricane impact and imperfect adjustment for it.

As a result, we’ll need to temper our enthusiasm for the housing and banking industries that may have resulted from this report. You can see today’s morning changes in relative stocks here.

Relative Housing & Finance Stocks	Wednesday Morning Change
Financial Select Sector SPDR (NYSE: XLF)	+0.2%
SPDR S&P Homebuilders (NYSE: XHB)	+0.3%
Bank of America (NYSE: BAC)	+0.1%
Citigroup (NYSE: C)	+0.5%
J.P. Morgan Chase (NYSE: JPM)	+0.3%
Wells Fargo (NYSE: WFC)	+0.4%
PulteGroup (NYSE: PHM)	-1.6%
Toll Brothers (NYSE: TOL)	-0.8%
Hovnanian (NYSE: HOV)	-0.8%

We can see that while homebuilders are up generally, the shares of these three relative players are lower today, perhaps correcting for earlier gains or for other very relative reasons. The financial shares listed here are up modestly, despite ongoing fiscal cliff pressures but perhaps in correction to previous decrease. It’s hard to say what the impact of this data is, but, with regard to Sandy, I believe investors are realizing that while reconstruction efforts will be broad, the benefits will be widespread among independent construction companies and perhaps minimal to a handful of publicly traded builders. I reiterate my favor of building supply stores for investors seeking a storm play.

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