Housing Market Monitor
New Mortgage Applications Plummet
February 6, 2008
By Dean Baker
"Fed rate cuts are now leading to higher mortgage interest rates."The Mortgage Bankers Association (MBA) weekly index for applications for purchase mortgages fell sharply last week to 362.0 (it rose back to 405.3 today). At the peak of the boom in 2005 it had regularly been over 500. However this drop substantially understates the true decline in mortgage applications for two reasons.
First, while the MBA members issue more than half of all mortgages, issuers of subprime mortgages are underrepresented among its members. This means that the loss of business among subprime lenders would not be fully picked up in the MBA index. In addition, since many lenders that focus on subprime mortgages have gone out of business, some of their would-be clients are now showing up at MBA members. This shift of business, from non-MBA members to MBA members, appears as an increase in mortgage applications in the index.
The other reason the MBA index understates the actual decline in mortgage issuance is that many mortgage applications are now turned down. A year ago, it was rare for an issuer to reject an application. Now it is quite common for issuers to reject applications from people with questionable credit records or applications for high loan to value ratio mortgages. Therefore, the same number of applications corresponds to fewer mortgages.
For these reasons, the MBA index, which is typically a very timely measure of conditions in the housing market, is not providing very useful information at present, unless it is possible to determine the size of these effects.
This week’s data shows a small rise in the average interest rate on a 30-year fixed rate mortgage to 5.61 percent from 5.6 percent last week. The rate had been at 5.49 percent two weeks ago. We now seem to be in the perverse situation where reductions in the federal funds rate lead to higher long-term rates. This means that further rate cuts, rather than being a source of economic stimulus, may actually depress the housing market and therefore have a negative impact on growth.
The latest price data indicate that prices are declining almost everywhere, but not all regions or price categories are being hit equally. Geographically, the most inflated markets in the California and Florida are taking the worst hits. Groups by price, the more moderately priced segment of the housing market is experiencing the worst decline.
For example in Boston, the Case-Shiller index shows that prices in the low tier segment of the market fell 7.3 percent over the last year, compared to a drop of 3.9 percent for the middle tier and just 0.4 percent for the high tier segment. Over the last quarter, prices in the low tier segment have been falling at a 12.8 percent annual, compared to an 8.6 percent rate for houses in the top tier.
In Phoenix, prices in the low tier have fallen 12.0 percent over the last year and have been dropping at a 22.2 percent annual rate over the last quarter. Prices for the low tier in Los Angeles fell 14.7 percent over the last year and have dropped at a 32.2 percent annual rate over the quarter. In San Diego, prices in the low tier index fell 20.9 percent over the last year and have fallen at an incredible 38.8 percent annual rate in the last quarter.
In these cities, and other markets where subprime and Alt-A mortgages comprised an extraordinary share of mortgage market, the tightening of credit over the last six months has thrown the lower portion of the housing market into a free fall. This situation was largely predictable given the excesses of the last few years. Unfortunately millions of recent homebuyers will pay a large price for the failure of professionals in real estate and finance to recognize the obvious – that the price spiral of this decade was a bubble that could not be sustained.
The latest employment report, showing a modest loss of jobs, is another big hit for the housing market. The downturn to date has been entirely due to the bubble’s own dynamic, with excess supply pushing prices downward. Now this dynamic will be amplified by the lower demand resulting from a weakening job market.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.