Mortgage applications: the trend

The mortgage applications have taken a roller coaster ride in January. The last week ended January 28 recorded an increase in the mortgage applications after a drop the previous week. The week before last ending January 14 witnessed a rise. So, the markets do not really know what is in store for them this year.

This see-saw trend in mortgage applications despite the record low mortgage rates deserves a closer analysis. The year beginning was a holiday mood and so one would not expect Americans to spend on mortgage though December witnessed very high demand for the same. The market fell by 3% in the New Year week. The second week witnessed a rise of 16.2% in mortgage applications to 682.9.

The holiday shortened following week saw a drop by 3.6% to 658.The last week saw the seasonally adjusted index increase 7.3 % to 706.4 according to the US Mortgage bankers Association. The refinancing is what caused the surge with a 16.6 % rise to 2,253.9 totally compensating the 5.7 5 drop the week last.

Why such a tendency? The mortgage gurus have a predicted a gradual rise in the rates after the decade long lowest rates in the last quarter. The economy is picking up .These predictions have provoked borrowers to take up refinancing and take advantage of the present situation. Thus we see there is no appreciable rise in the new home purchases. The purchase index fell to 439 from 448.1 over the last fortnight.

This trend in borrowers is caused by ‘inter temporal substitution effect’, whereby any increase in the rates might tempt the borrower to apply for a mortgage now before the rates become higher. This in effect raises short-run mortgage demand. Long term mortgage rates respond to inflation and share a directly proportional relationship. Thus the stability in the economy would reflect in the rates as well. The fall of one year ARMs from 4.21 to 4.08 has pulled up these loan type.

The housing industry has fuelled the economy since the 9/11 attacks and will continue the trend through this year too. The volatility marking January mortgage market is a farce and the trend is downward as rates are set to pick up. In the first few months may see a lot of people refinancing and hitting home runs in mortgages but the figures will not exceed that of the previous 2 years. Except God forbid another of those recessions!

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