Mortgage activity hit a record high last week, the Mortgage Bankers Association said Wednesday. But a gush of applications and refinancings couldn't create enough momentum to lift homebuilding stocks.

A weekly index of mortgage loan applications -- which measures both purchases and refinancings -- rose 6.2%, to 1,066.9, in the week ended Aug. 2, to break a record of 1,055 in the week ended Nov. 1, 2001.

"Last week's reports that economic growth was weaker than expected had a negative impact on stock prices. This led many investors to pull out of stocks and invest more in bonds," said Phil Colling, an economist at Mortgage Bankers Association. "This 'flight to quality' led to lower interest rates."

Still, after saying Tuesday that third-quarter revenue will fall slightly below year-ago levels, luxury builder Toll Brothers ( TOL) was off 1.9%, at $21.73 on Wednesday.

Other builders were losing ground, too. Pulte Homes ( PHM) was 1% lower, at $45.19, Lennar ( LEN) was behind 2.4%, at $45.69 and Centex ( CTX) was shedding 3.3%, at $45.09.

The drop comes despite a 7% increase in the refinancing index to 5,097.3. That gain is the result of a decline in fixed-term mortgage rates, experts said. Thirty-year rates fell to 6.17% from 6.32% a week earlier, while 15-year rates dropped to 5.55% from 5.73% in the prior week.

"It is possible that with interest rates at record lows, some consumers, who refinanced at rates above 7% for a 30-year fixed rate mortgage, are now refinancing again," Colling said.

Over the last two weeks, consumer confidence and existing home sales indicators have tumbled.

"Basically, the stocks are following the market trend," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. "A lot of expectation was built into a more vibrant economic recovery."

Fear that an economic recovery might not happen has dominated investor sentiment recently. "People are scared about the idea of a double-dip recession," said Larry Horan, an analyst at Pittsburgh investment bank Parker/Hunter. "Even though we haven't seen it in industry numbers yet."

Still, housing group earnings are expected to show improvement in the second half of the year. And while existing home sales fell in June, new home sales still rose modestly. According to the National Association of Realtors, both sales of new and pre-owned homes should hit record levels this year.

Since a low in September, the S&P homebuilding index is up 65%, but it's down 18% since July. "The group had a tremendous bull run. From a profit-taking standpoint, it's vulnerable," said Hyman.

Some point out that on a valuation basis, the homebuilding stocks now look appealing, however. Builders Toll, Pulte, Centex, and Lennar, on average, trade at 6 times 2003 earnings. That compares to an average multiple of 10 times forward earnings for the homebuilding group over the last 10 years.

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