Mortgage Demand Rises as Rates Fall, Refinancing Surges

Updated 12/6/2006 11:23 AM ET
By Julie Haviv, Reuters

NEW YORK — Mortgage applications rose sharply last week, as the lowest interest rates in more than a year prompted a surge in demand for refinancing, an industry trade group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, including refinancing and home-purchase loans, rose 8.1% to 647.6 the week ended Dec. 1 from the previous week's 599.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.98%, down 0.15 percentage point from the previous week, lowest since the week ended Oct. 7, 2005, when it stood at the same level. Interest rates were also below year-ago levels of 6.32%.

Dean Maki, chief U.S. economist at Barclays Capital in New York, said the mortgage bankers' indexes tend to be volatile but lower rates have enticed consumers, which will benefit the U.S. housing market.

"The decline in mortgage rates and the slowing in home price appreciation, along with the buildup in inventories, has led to a much better situation for home buyers through increased affordability as well as more inventory to choose from," he said. "Households are saying on surveys that home buying conditions have improved notably, and that has coincided with the stabilization in home sales."

Fueling the rise in mortgage applications last week was a 13.7% jump in the MBA's seasonally adjusted index of refinancing.

The refinance share of requests rose to 50.1% from 46.9% the week before, highest since April 2004.

Demand for home purchase loans was also robust.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of U.S. home sales, rose 4.9% to 426.6, highest since May. However, the purchase index was substantially below its year-ago level of 495.1.

The indexes also point to stabilization, with the sharp weakness in home sales and housing starts seen so far this year expected to ease in coming months, analysts say.

While mortgage lenders benefited from the increase in demand for home loans last week, home builders are still feeling the pinch of the slowdown in the country's once-soaring real estate market.

"Housing construction is extremely weak at present and is currently shaving more than a percentage point from gross domestic product growth," said Maki. "Home sales, on the other hand, appear to be stabilizing."

The gap between some fixed- and floating-rate loan rates is slim. Fixed 15-year mortgage rates averaged 5.66%, down from 5.86%, lowest since January. Rates on one-year adjustable-rate mortgages fell to an average 5.79% from 5.87%, lowest since March.

The narrowing gap between fixed and adjustable loans has been luring consumers to fixed-rate loans.

The ARM share of activity fell to 23.9% of applications from 24.5% the previous week, lowest since October 2003.

The MBA's survey covers about half of retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.

Copyright 2006 Reuters Limited.

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