Mortgage Applications Fall Again (KBH, LEN, PHM, DHI, BZH, XHB)

Mortgage interest rates remain historically low, but buyers are either unwilling or unable to take advantage of the low rates. After three straight weeks of increases in mortgage applications, borrowers backed off last week. This spells more trouble for homebuilders.

According to the Mortgage Bankers Association, the number of mortgage applications fell by -10% last week. Of that total, there were -2.3% fewer applications for new purchases and -12% fewer applications for refinancing. Refinancing accounted for 77.3% of all mortgage applications last week, down from 78.6% in the previous week, which might be slightly better news for new home builders if the total number of applications for new homes had increased.

As it is, builders like KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), D.R. Horton, Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH) will continue to face the dual headwinds of higher inventory at lower prices and hard-to-get credit for new home buyers. The expected spate of foreclosed properties soon to hit the market is also expected to make matters even worse for the builders.

Home sales are reviving a bit in some markets, as we noted our story on the cities where people want to buy homes. All are in sunbelt cities where underwater mortgages and foreclosures have kept prices low, and where many Americans may be looking for a place to retire. One interesting side note to the uptick in home sales in these cities is that buyers may be making all-cash purchases, and foregoing the whole mortgage application process.

About 30% of US homes sold every month are purchased by all-cash buyers. Nearly 20% of buyers are investors who plan either to rent the property or to flip it as soon as possible. It’s probably no surprise that nearly all these all-cash deals are made on foreclosed or distressed properties. According to the National Association of Realtors, about 30% of all sales in September involved foreclosed or distressed properties.

Another interesting note on mortgages is the rise in 15-year refinancing loans. Last month, 28.8% of all mortgages were of that type. At existing low interest rates, homeowners wanting to stay where they are may be able to refinance and end up paying less per month on a 15-year loan than they are currently paying on a 30-year loan. That assumes, of course, that the homeowner can get approved for the loan.

In September, about 18% of all mortgage applications failed to get approval. Part of the problem has been a lowering of loan limits by lenders, which raises the cost to buyers in areas of  expensive homes where buyers need to get a more expensive jumbo mortgage that exceeds $417,000.

The SPDR S&P Homebuilders ETF (NYSE: XHB) is up nearly 2% over the past 12 months, although it has dropped about -1.5% in the first few minutes of trading this morning. The individual homebuilders shares are down anywhere from -1% to -2.25% in early trading as well.

Paul Ausick