October 7th, 2009

Low Mortgage Rates Drive Applications Increase



Realtors and mortgage brokers are clamoring to get the $8,000 first-time homebuyer tax credit extended. Certain market observers fear that as soon as the tax credit expires, home sales will retract to the lower levels observed prior to the tax credit’s introduction (see our story on how Cash for Clunkers created a false sense of demand).

However, the recent surge in mortgage applications which coincided directly with last week’s drop in mortgage rates suggests that, one, it takes far more than just a tax credit to get borrowers interested in housing, and two, borrowers have and will continue to react to lower mortgage rates more strongly than any other homebuying incentive.

According to the latest issue of HSH’s Market Trends Newsletter, last week, 30-year conforming rates dropped to their lowest level since the spring. The Mortgage Bankers Association’s mortgage application index rose to its highest level since that same period:

Mortgage applications in the U.S. rose last week to the highest level since May as near record- low borrowing costs boosted refinancing and sent purchases to a 10-month high.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan jumped 16 percent to 756.3 in the week ended Oct. 2 from 649.6 in the prior week. The group’s gauge of refinancing surged 18 percent and its measure of purchases climbed 13 percent.

Not All About the Tax Credit

We have long been of the opinion that the tax credit, while helpful, is more of a minor incentive than anything else in terms of luring borrowers into the market. Low rates are what make those potential transactions more attractive and far more affordable. Borrowers must have several “ducks in a row” — including a sizable down payment, job security, steady income, and quality credit — when applying for a loan. An extra $8,000 can’t create something out of nothing — borrowers must be primed for a transaction before they can even consider applying for the credit.

“Low(er)” Rates, At Least for a While

The Fed’s decision to extend their mortgage-backed security (MBS) purchase program means that rates should stay subdued at least until the end of the first quarter of 2010 (when the program is slated to expire). However, since the Fed’s purchase total hasn’t been expanded, we may begin to see rates firm as MBS purchases slow.

Can Too Many Mortgages Apps Be A Bad Thing?

While the massive volume of loans written during the housing boom later came back to haunt us, the recent increase in applications isn’t worrying us at this time. Not only is the volume still small compared to historical levels, but today’s tight credit conditions have created a smaller, stronger class of more credit-worthy borrowers.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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