Wednesday, February 11, 2009

Reading Rates: MBA Application Survey – February 11 2009

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data indicates that the average rate for a 30 year fixed rate mortgage decreased 9 basis points since last week to 5.19% while the purchase application volume declined 9.76% while the refinance application volume decreased a whopping 30.30% compared to last week’s results.

In past weeks I have speculated that the MBA has some difficulty seasonally adjusting their weekly series during the months of November to February and with the latest release I’m feeling more certain of this.

For example, although it’s obvious that when rates decline refinancing and purchase activity increases, the last two months of release would have you believe that purchase activity during the weeks just preceding and just after Christmas met or even exceeded the activity seen throughout the height of the summer selling season… an unlikely result that MUST carry with it some element of distortion.

It’s important to note that the purchase application volume now sits at the lowest point in at least two years even as rates remain exceptionally low.

In the coming weeks I hope to provide more evidence that demonstrates that these indices are slightly broken.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).