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Purchase applications fall as we enter the seasonally slow period

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The MBA Purchase Index fell 2.6% for the week ending September 5

The MBA Purchase Index decreased 2.6% last week in response to strong bond market sell-off and a holiday-shortened week. We’re entering the seasonally slow period for the real estate sector, which pretty much lasts as long as football season.

MBA Purchase Index

Unlike the MBA Refinance Index, the MBA Purchase Index is driven by seasonal factors. The purchase index somewhat understates the true activity going on in the market, as professionals who are cash buyers have been responsible for a large chunk of the buying. The index won’t count their activity. For mortgage bankers, this could be a tough season, as they won’t have refinance activity to fall back on. Indeed, many of the big mortgage bankers have announced job cuts in their mortgage units.

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Ever since rates bottomed last year, the MBA Purchase Index has declined much less than the refinance index. This steadiness is largely because homebuyers tend to be less interest rate–sensitive than refinances, which are 100% interest rate–driven. Higher interest rates aren’t expected to impact purchase activity the way they affect refinance activity. Despite the rise in rates, housing remains highly affordable, though less affordable than it was two years ago.

Implications for homebuilders

We’re wrapping up earnings season for the builders, and so far, most have reported good earnings. Average selling prices are rising, but volumes are decreasing. That said, there’s still restricted supply. While housing is rebounding, it’s important to remember that these numbers are coming from an extremely depressed base. Prior to the housing bust, we only rarely observed a housing starts number below 1 million—usually at the lowest point of a recession. We are only recently hitting numbers above 1 million.

Homebuilders like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM), and Standard Pacific (SPF) have leveled off, but we’re still very early in the housing recovery. This is because the first-time homebuyers have been absent due to tough credit conditions and a difficult labor market. As those circumstances change, the market will release a lot of pent-up demand, which should drive homebuilder earnings for quite some time.

Investors interested in trading the builders as a sector should take a look at the S&P SPDR Homebuilder ETF (XHB).

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