Reverse Your Bank & Builder Bets on Bad Mortgage Data Today

Real Estate and securities investors might make the mistake of reading too much into the latest mortgage activity data reported today by the Mortgage Bankers Association (MBA). Please don’t make a panicked securities trade or real estate investment based on any one data point, and especially not this one this week.

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The MBA’s Weekly Application Survey for the period ending January 4 showed a sharp increase in mortgage activity. The Market Composite Index, which measures activity across all application types, increased 11.7% against the immediately preceding period. That’s a huge increase, and it will draw the attention of many investors reading sensationalized headlines published by the popular press and promoted by other media.

You might make the mistake of believing the data is clean, since the MBA offers this as the seasonally adjusted figure. When not adjusted for New Year’s Day, the MBA notes the Market Composite Index increased by 49%. But it’s difficult to perfectly account for holidays and the data-counters themselves will tell you not to rely too heavily upon data published through such noisy periods.

I’ve noted in years past that I believe the data adjustments are imperfect because they do not account for the slack in business activity on the day before and the day after a holiday, especially three-day weekends. I’ve noted that the MBA data often shows big swings in even the adjusted data around holidays. I reiterate that investors are better served by waiting a bit for cleaner data produced in cleaner periods. Furthermore and where offered, moving averages can help investors to see things more clearly.

An investor with an itchy trigger finger, noting such a big increase in mortgage activity this week, could direct capital into the biggest mortgage lenders and other specialists. The shares of some of the nation’s biggest mortgage lenders are mostly higher today, and I hope it is not at all related to this week’s mortgage data. It’s all I can do to warn investors, but traders will put capital to work for even the wrong reason if it turns a profit. Now these lenders have other issues affecting their trading today, and so we’ll look at other real estate related securities as well.

5 Major Mortgage Lenders	Wed. Morning Change (10:42 AM)
J.P. Morgan Chase (NYSE: JPM)	+0.7%
Citigroup (NYSE: C)	+1.2%
Wells Fargo (NYSE: WFC)	+0.8%
Bank of America (NYSE: BAC)	-0.7%
U.S. Bancorp (NYSE: USB)	+1.1%

It certainly looks to me like traders are in frenzy mode, and in error, due to the mortgage activity gain published today. The shares of major homebuilders are also much higher on the news. The gains in both lenders and builders are outsized versus the market, as the SPDR S&P 500 (NYSE: SPY) and the SPDR Dow Jones Industrials (NYSE: DIA) were up just 0.4% and 0.6%, respectively, at the same point in time.

Homebuilder Shares	Wed. Morning Change
SPDR S&P Homebuilders (NYSE: XHB)	+1.3%
PulteGroup (NYSE: PHM)	+0.9%
D.R. Horton (NYSE: DHI)	+2.5%
K.B. Home (NYSE: KBH)	+1.3%
Toll Brothers (NYSE: TOL)	+0.9%

Looking more closely at the data from the MBA helps to clarify things even further, and it should serve to guide traders in frenzy mode today to reverse positions before the close. The Refinance Index, measuring mortgage refinance activity, was marked up 12% against the previous week. However, the MBA notes that when comparing it to the week prior to the holidays, it’s up less than 1.0%. Likewise, the Purchase Index, which measures activity on the purchase of homes, was marked up 10% against the immediately preceding week. However, it was down 2% from the period before the holidays and down 8% against the prior year period.

This information demands that investors reconsider any investment fervor that might have been fueled by today’s report. I hope it has not pushed anyone into a premature or ill-advised real estate purchase, though I favor real estate purchases now generally speaking and where proper due diligence has been applied. Please consider this clarification and act accordingly in your interests.

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