So far, the extremely low mortgage rates that have been engineered by the Fed haven't done much to stimulate fresh housing demand. Those that have been able to take advantage of the rates--which have dropped below 5 percent--are mainly homeowners with good credit and enough home equity to refinance. While that helps to get more cash into Americans pockets, which they can pump back into the economy, it doesn't do much to halt plummeting sales and values.
So that's why the following data points from the Mortgage Bankers Association's weekly mortgage application survey for the week ending April 3 appear so encouraging:
The seasonally adjusted Purchase Index increased 11.1 percent to 297.7 from 268.0 one week earlier…The refinance share of mortgage activity decreased to 77.9 percent of total applications from 79.1 percent the previous week.
Although tempting, it's way too soon to get overly excited about this. Here are five reasons to treat this data with a healthy dose of skepticism.
1. Noisy data series: Patrick Newport, a US economist for IHS Global Insight, cautions observers not to read too much into the improved data, noting that the seasonal adjustment factors for weekly figures can be volatile and unreliable. "The MBA numbers are sometimes a good leading indicator," Newport says. "But other times they are more than noise, they are totally misleading," he says.
2. Just one week: Given the volatility of the data set, we'll need to see several more weeks of similar, solid improvements in the purchase index to be sure that more buyers are indeed trying to get into the market, says Mike Larson of Weiss Research. "You don't want this to be one of these short term spikes, you want to see if it sticks," Larson says.
3. Applications, not contracts: The other problem with this survey is that it tracks mortgage applications, not home purchases. In theory, of course, more mortgage applications should lead to more home sales. But in the current environment--with tighter credit and a slowing economy--many would-be home buyers will be turned down by mortgage lenders. "The reality is that even if application activity picks up, we have had a trend of…lower actual conversions from applications to closings," Larson says. "It's easy to apply for a loan, it’s a lot harder to qualify these days." That means an increase in the home purchase index might not presage the sales pickup it would have in other years.
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4. Shotgunnig: Larson also says that consumers may be "shotgunning" their applications. This practice, in which a single borrower sends applications to multiple lenders in an attempt to boost their chances of approval, works to artificially inflate the home purchase index.
5. Labor market still declining: That's not to say that the MBA survey isn't at all encouraging, it's just too soon to tell what it means for the housing market. A broad-based housing recovery faces a number of tough obstacles, perhaps the most onerous of which is the erosion of the labor market. Record low mortgage rates and falling home prices won't be enough to get buyers off the sidelines if they don’t know if they'll have their job in six months. So until the labor market begins to improve, it will be tough for the housing market to rally.