Subprime Struggles Skew Home Loan Figures
Tighter lending standards in the aftermath of rampant defaults on bad credit mortgages are hurting more than would-be home buyers.
It looks as though these tougher measures have weakened the value of one of Wall Street’s favorite measures of the U.S. housing market.
With home loans harder to come by, analysts say prospective borrowers are taking a shotgun approach to getting a mortgage - blasting out multiple applications to obtain a single home loan.
That, they believe, is falsely inflating the Mortgage Bankers Association Weekly Mortgage Applications Survey on loans to buy homes, giving a wrong impression of the pace of U.S. home sales.
“Frankly, the data has become a much less important indicator,” said James O’Sullivan, economist at UBS Securities in Stamford, Connecticut.
Skewed home loan data makes it less reliable, therefore diminishing its value to economists who use it as a gauge of home sales.
The MBA’s seasonally adjusted purchase index dropped 1.6 percent to 446.5 in its latest survey, released Wednesday. The index, however, has been on an upward trend and was up 12.0 percent from its reading a year earlier and a whopping 18.9 percent above October 2006.
Until earlier this year, that would have pointed to a pick-up in home sales. No more. Home sales have fallen consistently since, with existing sales down for three months and new home sales also off in four of the past five months.
“Clearly there has been a complete breakdown of the relationship between the home purchase loan index and home sales in recent months, which historically has been a decent fit,” O’Sullivan said.
The divergence between the data sets raises other questions as well. Some wonder if, while not correctly predicting the pace of future residential transactions, it still shows that demand nevertheless remains strong.
“The bigger question is whether the purchase application index is telling the true story about housing demand,” said Mike Larson, a real estate analyst at investment firm Weiss Research in Jupiter, Florida.
“That tells me more borrowers may be applying for home loans, but fewer of them are being approved due to tighter lending standards,” Larson said.
Indeed, in the first quarter of 2007, a net 16.4 percent of home mortgage providers surveyed by the Federal Reserve indicated they were tightening residential mortgage standards.
That is the highest since the second quarter of 1991.
Trends in mortgage applications historically have precedent an increase in sales activity, with about a one-month lag. But the MBA’s applications data and the National Association of Realtors pending existing home sales index have fallen out of step. The NAR’s latest data show sales in May at their lowest level in more than five years.
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