Increase in Mortgage Applications Could Indicate Uptick in Demand
By Dean Baker
April 8, 2009
Delaying a home purchase is the best way to accumulate wealth right now.
The Mortgage Bankers Association’s index for purchase mortgage applications rose by 11.1 percent last week to 297.7. It had been hovering near 250 earlier in the year, so this suggests that there may be some modest uptick in home buying, although it important to be cautious about making too much out of one week’s data. Also, even last week’s reading is still way down from the readings during the bubble years, which often crossed 500.
The upward trend in the refinance index is clear. This index rose 3.2 percent last week to 6813.5, more than double the level from earlier in the year. This surge is being fueled by both record-low mortgage rates and the relaxation of refinancing rules at Fannie Mae and Freddie Mac. While refinancing will be good for many homeowners, easing the stress of their mortgage payments, its impact on the economy as a whole should not be exaggerated.
If $3 trillion in mortgage debt was refinanced (just under 30 percent of outstanding debt) with an average savings of 1.0 percentage point, then this would save homeowners $30 billion a year in mortgage payments. That is certainly helpful to the economy, but it is just 0.2 percent of GDP. Furthermore, a substantial portion of this benefit will be lost when people sell their home (often in the next few years), since they will have to absorb refinancing costs that average 0.6 to 0.8 percent of the loan.
The sharpest declines in house prices continue to be at the bottom end of the market. In Los Angeles, prices for homes in the bottom third of the market fell at a 27.6 percent annual rate in the last quarter and are down 36.3 percent year over year. These declines compare with a 21.6 percent annual rate for the market as a whole in the last quarter and by 25.8 percent over the last year.
In San Francisco, prices in the bottom tier have fallen at a 32.6 percent annual rate over the last quarter and by 39.2 percent over the last year. Prices for the bottom tier of houses in Seattle have fallen at a 32.1 percent annual rate over the last quarter and are now down by 17.3 percent over the last year. In Chicago, the declines are 34.3 percent for the last quarter and 20.5 percent over the year. Prices for homes in the bottom tier in New York declined at a 14.4 percent rate over the quarter and 12.2 percent over the last year.
In Washington, D.C., the price decline for homes in the bottom tier has been 44.6 percent over the last quarter and 36.9 percent over the last year. However, the big winner for price declines in the bottom tier is Phoenix, where prices have fallen at a 70.4 percent annual rate over the last quarter and are down 52.3 percent over the last year. Prices for the bottom tier of houses in Phoenix are now down by 60.8 percent from their peak in 2006.
The extraordinary rates of price decline in recent months indicate the enormous gains to potential homebuyers from waiting to purchase a home. For example, in Phoenix, a family that was considering buying a home at the cutoff to the bottom tier ($129,600) would have saved themselves over $20,000 by putting off their purchase for three months. In San Francisco, the savings from putting off a purchase for three months would have been more than $30,000. In Washington, D.C., the savings from waiting three months would have been over $40,000.
The savings from waiting to buy dwarf the $8,000 new homebuyer credit. For this reason, many potential homebuyers who are not worried about losing their jobs and have the ability to make a down payment may still opt to wait for evidence that the housing market has hit a bottom. In this economy, the best way to accumulate wealth is to put off buying a home. It is unfortunate that the government, or non-profits that ostensibly promote “asset-building,” are not counseling moderate-income, potential homebuyers to delay their purchases in these collapsing bubble markets.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.