Mortgage Refinance Applications Are Crumbling

Mortgage refinance applications have been taking a hit recently.

This morning's MBA purchase applications showed that refinance index was down 15% for the May 31st week.

The refinancing index is down four straight weeks, and was down 12% the previous week.

Refinance applications tends to be more sensitive to a rise in mortgage rates.

The MBA 30-year fixed mortgage rate climbed from 3.59% in the first week of May to 4.07% in the first week of June. The decline in refinance activity reflects the rise in mortgage rates, Ed Stansfield, chief housing economist at Capital Economics explained in an email interview. 

There are three key reasons to watch this data.

First, despite the recent sharp rise, mortgage rates are still at low levels. So the impact on refinance activity shows that both the housing market and overall economic confidence are still "fragile" and the the recovery is dependent on the loose monetary policy.

Second, is the impact on consumer spending, which Stansfield doesn't think will be "large."

Third, for those with adjustable rate mortgages (ARM) the rising interest rates have been a bigger blow. "This could offset some of the benefits of falling unemployment on delinquency rates, though again I would not really expect this effect to be large based on the rise in mortgage rates seen so far."

But how significant is it?

"In terms of its significance, in my view, it is less of a concern than if home purchase approvals had fallen to a similar degree – they have been softening too, but not by as much," Stansfield said. "After all, home purchase approvals are a better gauge of the strength of the demand for housing than the number of people who are switching from one mortgage deal to another."

Bottomline: Stansfield expects the housing market to continue to recover but says this data shows that the recovery "may not proceed in a straight line."

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