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Seasonality Trumps The Bond Market Rally

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The Mortgage Bankers Association Purchase Index falls 6.9% 

The Mortgage Bankers Association (or MBA) Purchase Index decreased 6.9% in the week ended December 12, 2014, despite a strong bond market rally. We’re entering the seasonally slow period for the real estate sector that pretty much lasts as long as the football season.

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 doesn’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 out last year, the MBA Purchase Index has declined much less than the refinance index. This steadiness is largely because homebuyers tend to be less sensitive to interest rates than refinances, which are driven by interest rate 100%. 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, although less affordable than it was two years ago.

Implications for homebuilders

We’re coming up on the earnings season for builders. 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 rarely observed a housing starts number below 1 million and usually at the lowest point of a recession. We’re only recently hitting numbers above 1 million.

Homebuilders, including Lennar Corporation (LEN), D.R. Horton, Inc. (DHI), Toll Brothers Inc. (TOL), PulteGroup, Inc. (PHM), and Standard Pacific Corp. (SPF), have leveled off, but we’re still very early in the housing recovery. That’s because tough credit conditions and a difficult labor market have made first-time homebuyers scarce, if not altogether absent. As those circumstances change, the market will release a lot of pent-up demand, which should drive homebuilder earnings for quite some time. For more on this topic, read Overview: The releases that could shape your portfolio this week.

Investors interested in trading the builders as a sector should take a look at the S&P Standard & Poors depositary receipt (or SPDR) Homebuilder exchange-traded fund (or ETF) (XHB).

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