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Mortgage applications tank as interest rate goes over 5%

by Constantine von Hoffman on January 23, 2009

Last week, average 30-year mortgage rates jumped 0.35 percentage points to 5.24%. Not coincidentally, that same week the Mortgage Bankers Association’s index of mortgage applications dropped nearly 10%.  (This came on the heels of the incredibly-not-surprising news about December’s  nearly 11% drop in new housing permits from November. Starts were down 15.5%.)

Apparently 5% is the magic number for mortgage/refi applications. Two weeks ago, when the rate for 30-year fixed hit 4.89%, refis hit a 5-1/2-year peak.

While refinance applications are down (MBA’s refi index dropped 12.4%), they are booming compared to mortgage apps which remain near eight-year lows. This is, in part, because of deflation. Buyers know that prices are only going to go down so they have no reason to buy. This trend will only increase as home-foreclosures further depress prices and sellers get more desperate. It makes absolutely no sense to buy right now.

I’ll be interested to see changes in the price of rentals. Here in the Boston area I saw a listing for a 1 bed room in a working-class neighborhood at about $1200. Hard to see that lasting. We will likely see more foreclosures as people who bought multi-unit properties see rents drop below what they’re paying for mortgages. This in turn will put more deflationary prices on housing and rents … where that ends is anyone’s guess.

Constantine von Hoffman is a veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Last 3 posts by Constantine von Hoffman

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  • The fed will continue to manipulate rates until they feel that the real estate market is starting to turn around. Good luck. This may take a while.
  • The fed will continue to manipulate rates until they feel that the real estate market is starting to turn around. Good luck. This may take a while.
  • Fielding Mellish
    The Fed's unprecedented foray into manipulating mortgage rates, while costing $56 billion so far (and $444 B left to go), has not nudged many people into buying a home (for the obvious reason that prices are still falling). What's also interesting is how little refinance borrowers' cash flow is affected by refinancing: If someone has a $200k loan at 5.875% with 28 years left and they refi onto a $205,000 30 year fixed @ 4.875%, their P&I drops from $1,214.53 to $1,084.88. So their payment goes down by $130. That's a fairly minor payment adjustment, in my opinion. It certainly wouldn't incent many people to go buy an SUV and save GM from bankruptcy. Not to mention that the only people who qualify for conventional refinances nowadays are already sitting pretty with equity in their homes.

    Whenever the Fed is done buying agency MBS's, rates will spike up, which means that the present value of those $500B in MBS's will drop to...?...$450B? That's a pretty big cost just for the government to subsidize the refinance rates of people who were already in pretty good financial shape - with lots of equity in their homes.
  • Constantine von Hoffman
    Who is this Fielding Mellish person and what does he keep saying things I agree with? That's the real mystery.
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