Higher Rates Exposing Underlying Housing Weakness

By The Greek:

For three straight weeks now, mortgage activity has been on the downslide and we cannot ignore it any longer. It illustrates how sensitive the housing market is to low interest rates and how vulnerable the housing recovery still is to disruption.

The Mortgage Bankers Association (MBA) reported its Weekly Applications Survey for the period ending May 24, 2013 on Wednesday. The MBA’s Market Composite Index collapsed by another 8.8% on a seasonally adjusted basis in the latest period, after dropping by 9.8% last week and 7.3% the week before that. Activity declined in mortgage refinancing activity and in mortgage activity tied to the purchases of homes over the three week period, though purchase activity improved in the latest week.

Week of	Market Composite	Repurchase Index	Purchase Index
May 24	-8.8%	-12%	+3.0%
May 17	-9.8%	-12%	-3.0%
May 10	-7.3%	-8.0%	-4.0%

Yet, you hardly hear whimper of it from the popular press and major media. News of this developing situation has not really reached the masses yet. Recent tests of the shares of mortgage bankers and homebuilders instead reflect the latest market uproar about potential Federal Reserve tapering of its dovish monetary policies. Well, that potential tapering would lead to higher mortgage rates, and that is precisely what is stalling activity here. So investors in real estate, and in the shares of the real estate complex, including of course mortgage bankers and homebuilders should be concerned. This is the issue impacting shares of the housing complex on Wednesday. Banks have strangely avoided the day’s demise, but as investors connect the dots, I expect we will also see concern reflected in finance, as it was on the relatively similar Fed flurry.

Company	Wednesday
Bank of America (NYSE: BAC)	+1.0%
Citigroup (NYSE: C)	+0.9%
Wells Fargo (NYSE: WFC)	+0.6%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-2.9%
Hovnanian (NYSE: HOV)	-1.8%
Radian Group (NYSE: RDN)	-1.9%
MGIC Investment (NYSE: MTG)	-4.2%

Just look at how much mortgage rates have increased over the last three weeks.

Mortgage Loan	May 24	May 17	May 10
30-Yr. Fixed Conforming	3.9%	3.78%	3.67%
30-Yr. Fixed Jumbo	4.07%	3.93%	3.87%
30-Yr. Fixed FHA Spons.	3.62%	3.53%	3.43%

If housing is so sensitive to synthetically lowered rates, it must reflect an economic reality that differs from what investors seem to see. It reflects a real unemployment level nearer to 12% than 7.5%, and the reality of 7.5 million unaccounted for jobless Americans. Some will say this issue is temporary, and simply reflects real estate investors holding off in the short-term for better rates. Only time will tell the truth, but put this on your radar nonetheless, and stay tuned, as your author here intends to keep a tap to this data.

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