Is the Federal Reserve Damaging the Mortgage Market?

The housing recovery continues to show it is heavily dependent on low interest rates induced by the Federal Reserve, as mortgage applications decline for the third consecutive week.

According to the Mortgage Bankers Association’s latest report for the week ending May 24, loan application volume dropped 8.8 percent on a seasonally adjusted basis from one week earlier. This comes after a 9.8 percent decrease in the previous week. These figures include both refinancing and home purchase demand, and cover over 75 percent of all domestic retail residential mortgage applications.

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The industry group’s Refinance Index plunged 12 percent to hit its lowest level since December 2012. On the positive side, the Purchase Index increased 3 percent after recently reaching its highest level in about three years. Compared to last year, the Purchase Index is 14 percent higher.

“Refinance applications fell for the third straight week bringing the refinance index to its lowest level since December 2012 as mortgage rates increased to their highest level in a year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Rates rose in response to stronger economic data and an increasing chance that the Fed may soon begin to taper their asset purchases.”

Overall, the refinance share of mortgage activity decreased to 71 percent of total applications, compared to 74 percent in the previous week. The refinance share has now declined for two consecutive weeks to reach its lowest level since April 2012.

Interest rates continue to trend higher as chatter about the Federal Reserve “tapering” its bond-buying programs heats up. The average interest rate for a 30-year fixed-rate mortgage came in at 3.90 percent, up from 3.78 percent in the previous week. That is the highest rate since May 2012. The most recent average rate for a 15-year fixed-rate mortgage also increased from 2.96 percent to 3.10 percent, its highest level since August 2012.

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The latest Federal Open Market Committee minutes – released last week – ignited speculation about the Fed dialing down its presence in the market. The central bank stated, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”

In morning trading, home-improvement names such as Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD) edged lower. Home builders such as Lennar (NYSE:LEN) and Toll Brothers (NYSE:TOL) both fell more than 1 percent.

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