Mortgage loan applications at lowest levels in four years
Evidence of the housing slowdown is mounting as the Mortgage Bankers Association reported Wednesday that home loan applications in the last week of July fell to their lowest level in four years.
The drop was caused by both a decline in house sales, which reduced demand for loans to purchase homes, and the dampening of refinancing mortgages because of higher interest rates.
Existing homes are selling at a pace that is 9 percent slower this summer than last, the National Association of Realtors says.
And although the interest rates and points charged on traditional 30-year mortgages declined by .07 points each at the end of July to 6.62 percent and 1 point, interest rates remain much higher than they have been in years. Mortgage backer Freddie Mac says July's 30-year fixed rates were the highest in four years. One-year adjustable rate mortgages, at about 5.8 percent, are at their highest level in five years.
Freddie Mac economist Frank Nothaft said Wednesday that the latest numbers still give him hope for a soft landing. Housing sales will most likely end the year lower than 2005's all-time record, but that will still make 2006 one of the busiest years in real-estate history, he noted.
Refinancing activity, however, will most likely plunge as interest rates rise. A survey of Freddie Mac borrowers has found that most refinancers are locking into new loans that charge more interest than their old first mortgages. But Nothaft says that the borrowers may still be reducing their monthly payments if they are using the refinance to pay off home equity lines of credit, which are currently charging about 9 percent.
A slowdown in the rate of housing appreciation is also likely to cut into refinance demand. A record 88 percent of all refinancers took out at least 5 percent more than their original loan in the second quarter, Nothaft noted. So far, borrowers have been drawing down only about as much as their homes have appreciated. The average amount of owners' home equity has remained stable at about 45 percent for the past five years or so, he said.
That may change, however, if more areas experience dropping home values.
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