MBA Purchase Index fell slightly
Mortgage purchase applications fell 3% in the week ending June 24, 2016. We’re at the tail end of the seasonally strong period for house purchases. Homeowners generally want to move during the summer, before school starts. Inventory remains an issue. There are so few homes available for sale right now that it’s impacting mortgage applications.
In the above graph, you can see the spike in applications as buyers and originators tried to get in under the wire before the TILA-RESPA Integrated Disclosure rule took effect. Ever since rates bottomed out in 2013, the MBA (Mortgage Bankers Association) Purchase Index has fallen much less than the MBA Refinance Index.
The steadiness is mainly because homebuyers tend to be less sensitive to interest rates than those looking to refinance. The latter are driven 100% by interest rates. Even if rates increase, people still move, get married, and move out.
Implications for homebuilders
The spring selling season is in the later innings for homebuilders. For the most part, orders and backlog have increased. The next big event for builders such as Lennar (LEN) will be the return of the first-time homebuyer. D.R. Horton (DHI) is rolling out a new brand called “Horton Express” to target the first-time homebuyer.
These buyers might be waking up after a long slumber. Household formation numbers have risen in the last few months. While many first-time homebuyers will undoubtedly be renters, the news is encouraging for the sector.
The luxury end of the sector is represented by Toll Brothers (TOL), which is doing extremely well. However, it has exposure to hot urban markets. Toll Brothers performed well as a dollar play for foreign investors. PulteGroup (PHM) is joining D.R. Horton in targeting the first-time homebuyer.
A lack of skilled labor has been an issue for builders. This could be why we’re seeing housing starts creep up slowly. The fall in energy prices could draw many skilled construction workers from the energy patch back into home construction.
Investors can trade in the homebuilding sector through the SPDR S&P Homebuilders ETF (XHB).
In the final part of this series, we’ll look at mortgage refinance applications for last week.