Mortgage Activity Drops; Rates Rise

Mortgage application volume drops 18.6% last week as mortgage rates edge higher.
By Miriam Reimer ,

(Mortgage activity report updated with analyst commentary and data on existing-home sales.)

WASHINGTON (

TheStreet

) -- Mortgage applications fell sharply last week as

mortgage rates

pushed higher for the sixth straight week.

The volume of mortgage loan applications decreased 18.6% on a seasonally adjusted basis in the week ending Dec. 17, the Mortgage Bankers Association said early Wednesday.

Mortgage activity fell 2.3% in the prior week.

Refinancing application volume dropped 24.6% from the previous week. It was the sixth consecutive weekly drop in refinancing activity after falling 0.7% in the prior week. Home-purchase loan applications fell 2.5% in the week, on a seasonally adjusted basis, after ticking 5% lower a week earlier. On an unadjusted basis, the MBA's purchase index was 8.4% lower than in the year-earlier week.

>>Homebuilder Stocks: Behind the Numbers

A total of 72.3% of all loan applications last week were for refinancing existing mortgages, down from a 76.7% share in the prior week.

"Refinance application volume dropped sharply this week as mortgage rates held near six month highs," said Michael Fratantoni, MBA's vice president of research and economics. "Purchase applications fell for a second week, with the level of applications little changed over the past month, indicating that home sales are likely to remain relatively weak over the next few months."

The average rate on a 30-year fixed mortgage edged up to 4.85%, from 4.84% in the prior week. It was the sixth consecutive weekly increase and approached six-month highs. Still, mortgage rates remain near all-time lows.

Rising mortgage rates, which some market watchers view as deterring home buying activity, are not likely to continue to rise, but are also unlikely to return to record lows seen in recent months, according to Paul Anastos, president of Mass.-based Mortgage Master.

He told

TheStreet

that

better-than-expected existing-home sales data for November, which came out earlier Wednesday, was encouraging.

"We can draw a conclusion that potential buyers are seeing a relationship between still-low mortgage rates and favorable prices to buy homes...it comes down to

perceptions of affordability."

Despite the uptick, the road to a sustainable housing recovery is long, Anastos said. Last month's pace of sales of previously occupied homes remains 27.9% below year-earlier levels in Nov. 2009, the initial deadline for the

first-time buyer tax credit.

>>Lennar, Hovnanian: Homebuilder Winners & Losers

"It comes down to the basics -- unemployment remains high and consumer confidence remains low, so people are not in a position to be out buying homes," he told

TheStreet

. "We're at the best home affordability levels seen in 30 or 40 years, but it comes down to confidence. Can I make payments? Will I have a job? This is driving the housing market."

Anastos said

rising mortgage rates, which some market watchers view as deterring home buying activity, are not likely to continue to rise, but are also unlikely to return to record lows seen in recent months.

Last week's

disappointing homebuilding permits data further confirms that the "housing market recovery remains fragile at best," Kevin Brungardt, CEO of RoundPoint Financial, a mortgage origination and servicing firm, told the

TheStreet

.

He cited the usual suspects of high unemployment, potential buyers' low confidence among in the stability of home prices and the large inventory of distressed properties that still need to be cleared.

Foreclosure activity declined dramatically in November, but Brungardt said the 21% month-over-month drop was "a false positive," a result of the so-called "robosigning" scandal that led to procedural delays and foreclosure moratoriums at servicers like

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

. Even

Fannie Mae

(FNMA.OB)

and

Freddie Mac

(FMCC.OB)

, which stand behind the vast majority of U.S. mortgages, have said they won't push forward on foreclosures during the holiday season.

Brungardt estimated that the shadow inventory of homes could take two to three years to clear to a point when housing supply and demand begin to match up again, and that no acknowledged housing bottom will appear until that shadow inventory is significantly curtailed.

Homebuilders should expect material dampening of

new-home purchases until then, Brungardt forecast. Current homeowners will also continue to be impacted unfavorably, he told

TheStreet

last week.

Brungardt added that the recent spike in

mortgage rates -- a jump of 70 basis points over a short period of time -- also worked to delay a housing market recovery. Rates are still historically low, he conceded, but need to stay in the 4.5% to 4.75% range in order to fuel a meaningful recovery. He expects mortgage rates will fall again and then level out for a period of time.

>>Housing Market to Recover in 2013: Analyst

Stocks in the homebuilder sector moved higher this week, but the run-up was likely not based on expectations for this week's housing data, said Michael R. Widner, homebuilder analyst at Stifel Nicolaus.

The analyst said that the sector's gains more likely reflected market watchers' "positive sentiment of the economy turning a corner in 2011 so investors are taking money off the table of other pro-cyclical sectors like retail and putting it into sectors that haven't really moved yet."

Widner suggested that homebuilder gains may also be a result of "people looking to continue to ride the risk trade," and are "running out of places to put their money."

The homebuilder sector is well off its late-spring peak, when

buyers were rushing to take advantage of federal tax credits for homebuyers, and is only slightly higher than at the beginning of 2010. Whereas other sectors have begun a rebound in earnest, the housing sector continues to lag.

The

SPDR S&P Homebuilders

(XHB) - Get Report

, an exchange-traded fund that tracks the homebuilder sector, remains more than 60% off its peak of $46.08 in early 2006. The

iShares Dow Jones US Home Construction

(ITB) - Get Report

ETF remains more than 70% off its peak of $50.10 in the spring of 2006.

Some potential homebuyers have decided to go ahead and sign contracts, hoping to lock in still-relatively-low rates. Homebuilder

Toll Brothers

(TOL) - Get Report

, which surprised investors with a return to year-over-year profitability in its fiscal fourth quarter, recently said deposits jumped 10% in the second half of November compared with year-earlier results.

Many Americans suffer from negative equity, where the amount they owe on their home is higher than the value of it, making them unqualified for refinancing.

Still-depressed home prices do not seem to make it any easier. The

S&P/Case-Shiller 20-city index of national home prices rose slightly in September but home prices across the U.S. fell 2% in the third quarter after rising 4.7% in the second quarter. Data for October is due out next week, on Dec. 28.

Market watchers consider weakening home prices an ominous sign for the overall housing market.

New-home sales are expected to have risen to an annualized rate of 300,000 in November. Data on sales of newly built homes is due out on Thursday.

Homebuilders began construction on 3.9% more homes in November, better than the expected growth rate, while applications for building permits fell 4%, pointing to a softening in future homebuilding activity.

Stocks in the homebuilder sector were mixed but mostly higher on Wednesday.

The SPDR S&P Homebuilders gained 0.3% at midday while the iShares Dow Jones US Home Construction ETF added 0.8%.

Among individual builders, Toll Brothers rose 1.8%,

Lennar

(LEN) - Get Report

2.4%,

D.R. Horton

(DHI) - Get Report

1% and

PulteGroup

(PHM) - Get Report

1.4%.

Hovnanian Enterprises

(HOV) - Get Report

, which reported narrower quarterly losses but a steep drop in signed contracts after the closing bell Tuesday, lost 3.4%.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here:

Miriam Reimer

.

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.

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.

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