By Don Miller
Mortgage applications plummeted last week as a surge in interest rates put the brakes on the mortgage-refinancing boom.
The Mortgage Banker's Association yesterday (Wednesday) said that its seasonally adjusted index of applications fell 16% in the week ended May 29. The industry group reported its gauge, which includes both purchases and refinancings, dropped to 658.7 last week from 786 the week before.
The report clearly showed a slowdown in refinancing, as the number of homeowners revising their existing mortgages plummeted 24%, while new loan originations actually increased 4.3%.
Analysts said the biggest jump in interest rates since October slowed demand, as the average rate on a 30-year fixed-rate loan rose last week to 5.25%, from 4.81% the week prior.
"Up until the past week and a half, the Federal Reserve had been successful at bringing interest rates on mortgages down," Tom Marano, chief executive of mortgage operations at GMAC LLC (NYSE: GKM) told Reuters in an exclusive interview. He noted that home loan volume at the lender had plummeted about 75% from March, when mortgage rates had fallen as low as 4.61%.
But the refinancing slowdown may only be temporary.
As Money Morning reported Monday, prices and sales appear to be rising in certain housing markets. And on Tuesday, a report from the National Association of Realtors said that Americans signed more contracts to purchase previously owned U.S. homes in April than they had in seven and a half years.
That was the fourth increase in five months and may indicate the housing market is making a bottom.
"Based on what we just heard, we are now formally calling for the end of the housing depression and that we increasingly think that the housing market is beginning to turn up. All signs are pointing to a bottoming out now of the housing market" Bernard Baumohl, Chief Global Economist at the Princeton-New Jersey based Economic Outlook Group, told Reuters.
But foreclosures may have an impact on the pending sales figures down the road.
Because stressed properties are subject to a lengthy lending and approval process they take longer to close. And some pending contracts actually fall through before the transaction is finalized, Lawrence Yun the Realtor group's chief economist told Bloomberg News.
That means it may take longer for the housing market to recover and boost bank earnings - especially those who rely on mortgage lending for the majority of their profits.
"Business could be a whole lot better," James Gillespie, chief executive officer of Coldwell Banker Real Estate LLC told Bloomberg.
While business is brisk for first-time buyers taking advantage of lower prices driven by foreclosures, the market is still weak for move-up buyers trying to sell their existing home before buying a more expensive property, he said.
And while government policies are helping to stabilize the housing market, don't expect a full-blown rebound this year or even the first half of 2010, Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, told Reuters.
"Prices will continue falling because of foreclosures," she said. "Without policy, conditions would be even worse."
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