Proof the Housing Market Can Survive a Fed Interest Rate Hike
The reason behind the drop in mortgage applications
By Brena Swanson
January 2016
Top Producers
Gilroy Office, 2015
Marta Dinsmore, Realtor
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Sean Dinsmore, Realtor
Intero Real Estate Services
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A
lthough mortgage applications
significantly tumbled this week, the
Federal Reserve’s recent interest rate
hike is not to blame, according to a new
report from Capital Economics.
Capital Economics originally forecasted
back in December that the housing market
could withstand a rate hike, with this new
Mortgage
Bankers
Association
report giving early
evidence that it was
right.
The results for the
final two weeks of the
year include an adjust-
ment to account for
the New Year’s Day
holiday, while the
previous week’s results were adjusted for the
Christmas holiday. Last week is the only week
of the year that the MBA doesn’t release a
mortgage application report.
“It is tempting to ascribe that collapse to
the decision by the Fed to increase interest
rates for the first time in nine years at their
December meeting. After all, there is a
tight relationship between mortgage interest
rates and refinance activity,” said Matthew
Pointon, property
economist with Capital
Economics.
“But that is hard to
square with the data.
The rate hike was wide-
ly expected and as such
the rise in mortgage
interest rates has been
relatively subdued –
they increased from
4.14% at the start of December to 4.19%
by the end. While that would be expected to
lead to some contraction in refinancing, the
drop is far larger than usual,” said Pointon.
As a whole, Capital Economics explained
that total mortgage applications contracted
for the second month in a row in December,
recording a marginal decline of 0.7% m/m.
However, there is a substantial difference
between applications for home purchase and
refinance.
The report noted that after looking at the
numbers broken up, the drop was caused
entirely by a 6.3% m/m fall in refinancing
activity – a similar sized contraction to that
seen in November.
“That may reflect homeowners reacting to
news of the hike, rather than actual changes
to rates. However, we suspect that seasonal
factors are also playing a role. While the
MBA states there is no seasonal pattern,
it is notable that the last time refinance
applications dropped by such a large amount
was also in the last week of the year,”
said Pointon.
Applications for refinance had been rising
up to the final week of the year, when they
contracted by 28% - the largest week-on-
week drop since the end of 2009, Capital
Economics said.
Source: Capital Economics
Once refinance applications are taken out of the mix, applications for home purchases, which
is a better indicator of underlying housing demand, increased by a substantial 10.5% m/m.
This marks its highest level since early 2010.
“And they also held up in the final week of the year. That provides early evidence that
housing demand will be able to withstand a rise in interest rates, thanks to an improving labor
market and easing credit conditions. So while low inventory levels will constrain mortgage
lending to some extent, a gradual rise in applications for home purchase can be expected this
year,” said Pointon.
GILROY • MORGAN HILL • SAN MARTIN
MARCH/APRIL 2016
gmhtoday.com
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