Key insights from MBA's weekly mortgage applications review (Part 3 of 4)
The MBA purchase index is flat for week ending September 26
The Mortgage Bankers Association’s (or MBA) purchase index was flat last week despite a bond market rally. We’re entering the seasonally slow period for the real estate sector, which pretty much lasts as long as football season.
Unlike the MBA refinance index, seasonal factors affect the MBA purchase index. The purchase index somewhat understates the true activity going on in the market, as professionals who are cash buyers have been responsible for a large chunk of the buying. The index won’t count their activity.
For mortgage bankers, this could be a tough season, as they won’t have refinance activity to fall back on. Indeed, many of the big mortgage bankers have announced job cuts in their mortgage units.
Ever since rates bottomed last year, the MBA purchase index has declined much less than the refinance index. This steadiness is largely because homebuyers tend to be less sensitive to interest rates than refinances, which are 100% driven by interest rates.
Higher interest rates aren’t expected to impact purchase activity the way they affect refinance activity. Despite the rise in rates, housing remains highly affordable, though less affordable than it was two years ago.
Implications for homebuilders
We recently wrapped up earnings season for the builders, and so far, most have reported good earnings. Average selling prices are rising, but volumes are decreasing. That said, there’s still restricted supply.
While housing is rebounding, it’s important to remember that these numbers are coming from an extremely depressed base. Prior to the housing bust, we only rarely observed a housing starts number below 1 million, usually at the lowest point of a recession. We are only recently hitting numbers above 1 million.
Homebuilders like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM), and Standard Pacific (SPF) have leveled off, but we’re still very early in the housing recovery. This is because the first-time homebuyers have been absent due to tough credit conditions and a difficult labor market. As those circumstances change, the market will release a lot of pent-up demand, which should drive homebuilder earnings for quite some time.
Investors interested in trading the builders as a sector should take a look at the S&P SPDR Homebuilder ETF (XHB).
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