Is recent mortgage activity a win for the Fed?
January 24, 2012
Mortgage applications surged in the second week of January, responding to record low mortgage rates. The Federal Reserve's Operation Twist aimed to make security purchases that would drive mortgage rates down to support the housing market, so does the recent mortgage activity mean it's working?
You have to give the Fed partial credit on this one. While the record low level of current mortgage rates may not have turned the housing market around yet, it does appear to be helping.
Record low mortgage rates spark new activity
During the second week of January, 30-year mortgage rates reached a new low of 3.89 percent. Having spent all of 2011 below 5 percent, mortgage rates would already have been considered very low by historical standards, but since the middle of last year they've made a new push downward. Mortgage rates dropped below 4 percent for the first time in November, and current mortgage rates are more than half a percent lower than they were in mid-2011.
Mortgage demand has responded to these increasingly attractive rates. According to the Mortgage Bankers Association (MBA), their seasonally-adjusted index of mortgage application activity jumped 23.1 percent in the second week of January.
This figure doesn't directly translate to the actual level of new mortgages being written -- not all applications are approved, and people anxious to snap up a low rate might submit multiple applications. Still, as a general indicator of interest in mortgages, the MBA figures are a useful gauge, and right now that gauge suggests that people are responding to record low mortgage rates.
Refinances drive the numbers
There is a catch though. All this mortgage activity does not represent a surge of new buyers flooding into the housing market. While refinance applications jumped by 26.4 percent in the second week of January, new purchase applications rose just 10.3 percent. Refinance requests represented 82.2 percent of total mortgage applications, the highest portion in over a year.
In short, most of the recent mortgage activity does not represent new demand for housing. Instead, people are responding to the fact that refinance rates have fallen far enough that even those who bought homes after the housing bubble burst can now lower their costs even further by refinancing.
True support for housing
There is a cautionary element even in the 10.3 percent jump in new purchase applications. Housing demand may be overly dependent on artificially low mortgage rates. The question is, once the Federal Reserve runs out of tricks for pushing mortgage rates down, how much housing demand will remain?
Still, there is reason to cheer recent mortgage activity. The surge in refinancing represents a new wave of people who are able to save money on mortgage payments. That frees up part of their monthly incomes for spending elsewhere. It is new sources of spending that can launch the kind broader economic recovery that would provide sustainable support to the housing market.