The Mortgage Bankers Association (MBA) announced the recent mortgage purchase applications data for purchases and refinances. Even with seasonally adjusted numbers, the weeks ending on December 23rd and December 30th do not look good. With new purchases plunging nearly 10% (9.7% actual) in the two week period, and refinances dropping 1.9%, the housing market remains on shaky ground. Even while enjoying some of the lowest mortgage interest rates in history (averaging 4.07% during 2011 for well qualified borrowers on conforming loans; 3.96% on FHA backed loans), home sales remain down.
Before a person is willing to commit to buying a new home, they must be confident in their earning abilities, and the future of their income. When either the current income, or the future income, is questionable, people simply are not willing to purchase a home. This reluctance shows up in the MBA purchase applications for new homes. Low consumer confidence means that the overall economy is still struggling. But when new home purchases start to pick up, it sparks interest and spurs movement in other sectors as well.
Building a new home not only gets money to the mortgage brokers. It provides jobs for construction workers and other workers in the trades. The new homeowner will need furniture and appliances to fill the home, so new construction will spur retail sales. More demand for hard goods flows back to more demand on the manufacturing industries encouraging them to ramp production and hire new workers. All of these factors will work together in order to help the economy get back on a growth pattern rather than be stagnant refusing to recover. But if people are not confident in their jobs and the future of their income, they do not want to risk the possibility of losing their home, and thus will not make the commitment to buy new.
Instead of buying a new home, many people take advantage of the low interest rates and will refinance their existing mortgage. Often being able to save as much as $200 or $300 per month will relieve the burden they feel about keeping their mortgage. The refinance will help keep the title companies and the mortgage brokers in business. With several hundred extra dollars each month, people are more willing to spend money on consumable goods in all areas of the economy. While the impact is not as forceful and direct as the impact of the construction of a new home, good refinance numbers will show at least movement in the upward direction.
For people who have a steady job and are not in the housing market, they may wonder why this is important. The mortgage market is a leading indicator of the overall economy. This means when the mortgage market picks up, the rest of the economy is sure to follow. A healthy economy is one where money is constantly changing hands. While one or two weeks of declining mortgage application numbers is nothing to worry about, several weeks in a row cause concern for investors. When the major investors start to pull their money from the stock market, the overall market goes down, leading to a weakened economy. As this graph indicates, the mortgage market has been in a slump for a number of years, when the market starts to rise again, only then will we see the economy start to rise again.