The MBA Purchase Index is an important index to forecast housing activity
The Mortgage Bankers Association (MBA) index of purchase activity measures application activity, not loans made. The Mortgage Bankers Association samples roughly 75% of all mortgage activity in the U.S., and its indices are key indicators for the real estate finance market and home builders alike. The purchase index is released weekly, along with the mortgage applications composite index.
Housing economists use the MBA applications data to forecast numerous economic variables like existing home sales and new home sales. Originators will use the data for benchmarking their own activity. Mortgage REITs will use the refinance data to forecast prepayment activity, which is a critical factor in mortgage backed security returns. Home builders also will use the purchase index to forecast existing and new home sales. The purchase index tends to lead home sales by 4-6 weeks.
The MBA Purchase Index fell 1.37% for the week ending April 26
Unlike the refinance index, the purchase index is driven by seasonal factors. The real estate cycle starts picking up in April and the selling season peaks in the summer, lasting until late Fall. This year, we have not seen much, if any, drop in the index, which bodes well for the summer selling season.
Low interest rates are helping to drive purchase activity. The 10 year yield has been dropping since March, which has pushed the average 30 year mortgage rate to 3.43%. The Purchase Index somewhat understates the true activity going on in the market, as a large chunk of the buying has been professionals, who are cash buyers. Their activity will not be counted in the index.
Implications for the home builders
Lennar (LEN) and KB Homes (KBH) have a better than expected November fiscal year report for Q1 earnings, along with big increases in orders and backlog. NVR reported weaker than expected earnings earlier this week. Pulte (PHM), D.R. Horton (DHI), Meritage (MTH), and Ryland (RYL) reported better than expected earnings The remaining home builders will report later this week.
The Home builder ETF (XHB) is up smartly over the past 12 months, but we are still very, very early in the housing recovery. This is the first time home buyers have been absent due to tough credit conditions and a difficult labor market. As those circumstances change, a lot of pent-up demand will be released, which should drive home builder earnings for quite some time.