9:46 AM
MORTGAGE TALK: Applications for mortgage refinancings rose to their second highest level ever last week as consumers took advantage of falling mortgage rates. Applications for home purchases, however, fell to their lowest level since February 2000 (excepting a holiday-related drop last December). The Mortgage Bankers' Association's weekly refinancing index, which rose to a 3-year high and to the second highest level ever, will be one of the main transmissions by which the Fed's rate cuts help to lift the economy. The refinancing activity will not only help consumers to reduce their monthly mortgage payments, it will also result in a surge in so-called cash-out mortgages. In turn, consumer spending will be boosted. In the week ended October 5th, the Mortgage Bankers Association's mortgage purchase application index fell to to 271.2 from 308.8 the previous week. That brought the index about 10% below its 1-year average. The weakness is alarming in light of the recent decline in 30-year mortgage rates, which are now at a 3-year low, and the sharp drop in adjustable rate mortgages, which are near historic lows. The MBA's refinancing index, however, soared to 4285.70 from 3459.8 the previous week. That's the second highest level ever and roughly ten times higher than last year's pace. For the year, mortgage refinancing activity is running at 500% higher than last year's pace. The divergence in the trends of purchase and refinancing activity suggests that while consumers are clearly cognizant of current interest rate trends, key drivers of the housing market have eroded, namely confidence and income growth. Historically, these two factors have been the most important determinants of the strength of the housing market. There's little doubt that both confidence and income growth are now on the wane, suggesting that the housing market might soon weaken. Nevertheless, the strength in refinancing activity will help to offset some of that weakness; it's estimated that approximately $1 trillion Bln of mortgages might get refinanced this year--above 1998's record pace of $750 billion. Continued strength in refinancing activity is certainly possible. After all, it takes little in the way of confidence to refinance an existing mortgage. It is entirely another matter for consumers to engage in the purchase of a new home. The jump in the refi index will help to liquefy consumer balance sheets and ultimately aid the economy. Indeed, in the refinancing boom of 1998-1999, the Federal Reserve estimates that consumers tapped into their home equity to the tune of $55 Bln. The Fed estimates that most of the money went toward home improvement projects and other consumer expenditures. The balance went toward paying off debts. Fannie Mae has indicated that over half of the refinancings have consisted of cash-out mortgages and that on average households that the average cash-out was $30k. That will provide a significant boost to household spending. In 1998-1999, the refinancing activity also reduced monthly mortgage payments by an average of approximately $150 per month. It is important for home purchases to stay strong, however, as it speaks to perceptions about consumer confidence and income growth. If weakness in home purchases continues, this lack of responsiveness would indicate that interest rate cuts are not likely to exert all of their intended effects. Mortgage applications should continue to be watched closely to gauge the economy's responsiveness to lower rates. In Japan, for example, the lack of responsiveness (lending has fallen for 3 straight years) required that rates be brought down to zero. |
