Demand for home loans falls

Bob Willis
Bloomberg News
Mar. 22, 2006 02:55 PM

U.S. mortgage applications fell last week to the lowest level of the year as home purchases and refinancing declined, a sign housing will be less of a source of strength for the economy.

The Mortgage Bankers Association's weekly application index dropped 1.6 percent to 565.0 from 574.4. The Washington-based group's purchase gauge fell 2.3 percent to 393.6.

A rise in mortgage rates this year is limiting sales and making it less profitable to refinance existing loans. Home sales are forecast to fall after five years of records and price appreciation may ebb, making it more difficult for consumers to finance spending by borrowing against their homes.

"Housing-related activity has definitely slowed and its contributions to economic growth, both direct and indirect, will fade over the next couple of quarters," said Steven Wood, chief economist at Insight Economics in Danville, California.

Purchase applications are down 26 percent since reaching a high in June of last year, the mortgage bankers group said.

The average rate on a fixed 30-year mortgage fell to 6.31 percent last week from 6.42 percent the prior week, the bankers' group said. Borrowing costs for every $100,000 of a loan would be $619.62 a month, based on last week's contract rate for a 30-year fixed mortgage, compared with $596.34 a year ago when the average rate was 5.95 percent.

Federal Reserve policy makers have raised their benchmark interest rate 14 consecutive times since June 2004 to restrain inflation, and most economists surveyed by Bloomberg News forecast at least two more increases this year from the current 4.5 percent.

The mortgage bankers group's gauge of refinancing fell 0.6 percent to 1574.5 from 1583.6. The index is down 47 percent from a 12-month high reached in June.

The cash extracted by homeowners from refinancing conventional mortgages may drop to $117 billion this year from an estimated $243 billion last year, according to a report last month from Freddie Mac, the No. 2 buyer of mortgages.

As the housing market cools, consumer-spending growth from April through June will slow to 2.9 percent from an estimated pace of 4.7 percent this quarter, according to the median estimate in a Bloomberg News survey of 74 economists from Feb. 27 to March 7.

Federal Reserve Chairman Ben S. Bernanke, in remarks to the Economic Club of New York on March 20, said consumer balance sheets appear healthy, and the increase in household mortgage debt "may not be a particularly serious problem" because families have replaced higher-rate consumer debt with home loans.

"Families have made a lot of progress in restructuring their liabilities," he said.

Bernanke said the re-pricing of adjustable rate mortgages as fixed-rate lock-in periods end would be gradual, and would not have a large effect on household finances.

Even though interest rates have risen, "the impact on interest costs for households are not that high," he said.

Sales of new and previously owned homes will fall 6 percent to 7.85 million this year from a record 8.35 million in 2005, the National Association of Realtors said on March 13. The median existing home price will rise 6 percent to $220,300, about half last year's gain.

"Although the housing market is slowing down, we're returning back to more healthy levels than we have seen over the years," said John Sauro, president of North Atlantic Mortgage Corp. in an interview from Silver Spring, Maryland.

The average 15-year rate fell to 5.99 percent last week from 6.06 percent the week before, today's report showed. The rate on a one-year adjustable mortgage rose to 5.68 percent from 5.64 percent.

Refinancing's share of total applications rose to 38.1 percent last week fro 37.7 percent the week before. The percentage of adjustable-rate mortgages fell to 28.3 percent from 28.8 percent.

The Mortgage Bankers Association's survey covers about half of all U.S. retail residential mortgage originations and has been compiled every week since 1990.