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Shortly after the Federal Reserve's decision to raise the federal funds rate in December 2015, mortgage applications started to fall. Is the Federal Reserve's rate hike to blame or was it really just a seasonal drop off?
The Mortgage Bankers Association (MBA) reported Wednesday that for the week ending January 1, 2016, mortgage applications decreased 27 percent from two weeks earlier, according to their Weekly Mortgage Applications Survey.
The MBA said that this week's results include an adjustment to account for the New Year's Day holiday, while the previous week's results were adjusted for the Christmas holiday.
The MBA's data showed that mortgage loan application volume, decreased 27 percent on a seasonally adjusted basis from two weeks earlier. On an unadjusted basis, the Index declined 50 percent compared with two weeks ago.
On the other hand, the Refinance Index decreased 37 percent from two weeks ago. The seasonally adjusted Purchase Index decreased 15 percent from two weeks earlier. The unadjusted Purchase Index decreased 40 percent compared with two weeks ago and was 22 percent higher than the same week one year ago.
"The collapse in refinancing activity in the final week of 2015 looks to reflect seasonal issues, rather than a reaction to the Fed hiking interest rates. Indeed, applications for home purchase held up and are now at their highest level in almost six years," said Matthew Pointon, Property Economist at Capital Economics.
The refinance share of mortgage activity decreased to 55.4 percent of total applications from 56.1 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 4.7 percent of total applications.
The FHA share of total applications increased to 14.6 percent from 13.8 percent the week prior. The VA share of total applications increased to 12.9 percent from 11.6 percent the week prior. The USDA share of total applications remained unchanged from 0.6 percent the week prior.
While it is tempting to want to blame the drop off in mortgage application on Federal Reserve's decision to raise rates, Pointon believes that much of the decline is due to seasonal changes and other factors.
"It is tempting to ascribe that collapse to the decision by the Fed to increase interest rates for the first time in nine years at their December meeting. After all, there is a tight relationship between mortgage interest rates and refinance activity. But that is hard to square with the data. The rate hike was widely expected and as such the rise in mortgage interest rates has been relatively subdued – they increased from 4.14 percent at the start of December to 4.19 percent by the end," Pointon said.
He added, "That may reflect homeowners reacting to news of the hike, rather than actual changes
to rates. However, we suspect that seasonal factors are also playing a role."
