Purchase Applications Fall to 13-Year Low

For the third consecutive week, mortgage applications declined nationwide. Of particular interest is the drop in purchase applications to the lowest level since 1997. Despite the continued availability of the $8,000 first-time homebuyer tax credit and the $6,500 move-up homebuyer tax credit, it now appears the beleaguered housing market may remain in a weak position without further intervention from the federal government.

Earlier this month, William C. Dudley, President of the Federal Reserve Bank of New York, indicated that the Federal Reserve may choose to buy additional mortgage-backed securities beyond the $1.25 trillion they are obligated to purchase by March 31. “Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages.”

For the week ending February 19, the Mortgage Bankers Association (MBA) reported a decline of 8.5% for all mortgage applications, including both refinances and purchases. The report released by MBA is comprised of data from more than half of all retail residential mortgage applications nationwide, and is considered one of the most-trusted resources of mortgage application statistics since 1990. The decline in purchase applications alone represented a 7.3% decrease from one week earlier, and represents the lowest level since May 1997.

When current mortgage rates rise, the increase is typically less of a factor in purchase demand when compared to refinances. Therefore, government intervention in terms of keeping current mortgage rates artificially low may not be the answer. Alternatively, any intervention from the federal government should be in terms of purchase incentives in the form of new tax credits.

Some market analysts believe the decline in purchase applications could be blamed on the recent winter weather that dumped several feet of snow up and down the East Coast, but that is only a single factor. According to Michael Fratantoni, MBA’s Vice President of Research and Economics: “As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak … With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases.”

Time will certainly tell.

–Robert Hyder