Rising mortgage interest rates were perhaps the pivotal reason the Federal Reserve refrained from cutting back on QE3. In the post-meeting communiqué, the Fed clearly said it was unhappy with the hardening in interest rates witnessed after the previous meeting.
Societe Generale Cross Asset Research analyzed the impact of this recent ‘backup’ in mortgage interest rates on mortgage application volumes.
Mortgage interest rate trends
In the chart below, interest rates for the 30-year FRM are plotted alongside the yield on the 10-Year T-Note. One can see the two move with high correlation. Of particular note is the sharp upswing seen in both after the recent low seen in April.
Impact on Mortgage applications
The impact of the hardening rates on mortgage applications was almost immediate. Refinancing applications are particularly sensitive to this, and according to statistics available from the Mortgage Bankers Association (MBA), refinance applications during the period of May-beginning to September-beginning plunged sharply by over 65%. On a total basis, applications for new homes and refinancing were down over 59% – this was accounted 95% by refinancing alone. This is clearly visible on the graph below which plots the 30-year FRM rate on the left with the MBA Refinancing Index. The lag after April is clearly visible.
However, the impact on new purchase applications was clearly far less severe. These fell by only 14.7% in that period.
Given the above perspective, SocGen analysts feel that unnecessary focus has been placed on a percentage decline in the applications rate, and that the reality of the market may be somewhat different, as noted in the above breakdown between new and refi apps. Another issue to note is that the housing market includes a substantial component transacted in cash (no mortgages) and this would be unaffected by the rate hikes.
Recent data out of the housing market
Macro data out of the housing market is excellent, and there appears to be no real impact of the hardening rates on its underlying fundamentals. The analysts cite the sharp rise seen in single-family building permits, housing starts and new contracts during August. Homebuilder optimism stood at an eight-year high in September.
New home sales in August rebounded from a July dip, as builders sold new houses and condos at an annual rate of 421,000, the Census Bureau said on Wednesday. Sales climbed 7.9% from the 390,000 annual rate recorded in July.
Sales of existing houses climbed 1.7 percent in August to a six-and-a-half-year high. The National Association of Realtors said on Thursday that existing houses were selling at an annual rate of 5.48 million units, the highest level since early 2007, when a housing bubble was deflating and the economy was sliding toward its deepest recession in decades.
It therefore appears that the rate increases have, so far, had a limited impact on the internals of the housing market.