Home Purchase Apps Hit Near 20-Year Low

Mortgage application volumes finished out the summer on a low note, slipping nearly half a percentage point as home purchase numbers hit a near 20-year low.

Based on weekly data released by the Mortgage Bankers Association (MBA), macroeconomics firm Capital Economics calculated a 0.4 percent monthly decline in mortgage applications in August.

It was the third drop in the last three months, following declines of 0.1 percent in June and 3.4 percent in July.

Applications for home purchases also weakened for a third straight month, sinking to their lowest level since 1995 with another 3.6 percent decline. Out of those few applications that are coming in, an increasing share is focused at the higher end of the market, painting a bleak picture of demand among first-time and low-income homebuyers.

"[T]he average value of a mortgage application for home purchase has increased far more than average house prices over the past couple of years," said Paul Diggle, property economist for Capital Economics. "It seems that only high earners with (presumably) strong credit scores are currently confident enough to apply for mortgage finance."

Despite that grim news, Diggle says other mortgage market indicators offer a little more hope—in particular, the Federal Reserve's recent Senior Loan Officer Survey, in which a net 45 percent of bankers reported an increase in mortgage demand through the summer.

On the refinance side, applications were up 2.0 percent in August following a decrease of 3.3 percent in July, owing in part to a drop in mortgage rates from 4.52 percent earlier in the year to 4.31 percent in the latest report.

Still, though, refinance applications were down 34 percent year-over-year in August, reflecting the toll that last year's rise in interest rates took on demand.

"Based on the past relationship, a sustained period of strong refinancing activity would require 30-year rates to drop 30-40 basis points from their current level, which is not going to happen. Rather, we think that as monetary tightening approaches, mortgage rates may rise by that much by the end of the year," Diggle said.

Even if rates do rise, Diggle says the "still-favourable mortgage affordability picture," combined with strengthening economic growth and strong job gains, should create a better environment for home purchase activity over the year's second half.

In August's last week alone, MBA reported a seasonally adjusted 0.2 percent pickup in application activity. Volumes were mixed between refinances and purchase applications: applications for refinancing came up 1 percent from the previous week, while home purchase applications were down a seasonally adjusted 2 percent.