Mortgage applications index rises

Forecasts of rate rise might be prompting homebuyers to act

May 09, 2004|By BLOOMBERG NEWS

An index of U.S. mortgage applications rose for a second week, suggesting that forecasts of higher interest rates might be prompting some people to buy houses, an industry report says.

The Mortgage Bankers Association's index of applications rose 4.4 percent last week to 780.9. The index of applications to purchase homes increased 4.1 percent to 482.5. It reached a high of 501.6 in January.

The rise was reported as the average rate on a 30-year fixed mortgage increased to 6.01 percent last week. The expanding economy and an increase in inflation prompted Federal Reserve policy-makers to take a step closer last week to raising their benchmark interest rate from a 45-year low.

Housing accounts for 5 percent of the economy and helps generate economic growth by spurring sales of home-related goods such as furniture, appliances and electronics.

U.S. central bankers voted unanimously Tuesday to keep the benchmark interest rate at 1 percent. Fed officials dropped a pledge to be "patient" with monetary policy and said "policy accommodation can be removed at a pace that is likely to be measured."

Rising borrowing costs "will result in a slight cooling in housing - we're projecting that this year will be the second- best on record - but not a crash," said David Lereah, chief economist of the National Association of Realtors in Washington. "The reason mortgage rates are going up is the economy is strong, and that helps housing, so the rise in rates is not a 100 percent negative for housing."

Economists expect refinancing, which has been a source of cash for consumers the past few quarters, to dwindle.

The gauge of applications to refinance loans rose 4.7 percent to 2,516, its first rise in six weeks. The index is down about 50 percent from the eight-month high it reached March 19.

The amount of equity U.S. homeowners will turn into cash this year probably will fall 18 percent from a record set last year, according to Freddie Mac, the No. 2 purchaser of U.S. mortgages.

"We'll see less stimulus from cash-out refinancing in 2004, but that's OK because it's still a pretty healthy number and our economy is moving into a period of very strong economic growth, meaning there will be job creation and rising income," said Frank Nothaft, chief economist of the McLean, Va.-based mortgage financier.

Toll Brothers Inc. Chief Financial Officer Joel Rassman said an increase in the Fed's benchmark interest rate of as much as 200 basis points could be weathered without harm to sales.

"Our customers are much more insulated from the vagaries of interest rates," Rassman said. The Huntingdon Valley, Pa.-based company is the largest U.S. builder of luxury houses.

Rassman said the company expects to post a "record year" in fiscal 2004, which ends in October, and probably in fiscal 2005 because of a "very long backlog of deliveries."

Sales of new and existing houses will total 7.09 million, second to last year's record of 7.19 million, Mortgage Bankers Association Chief Economist Douglas Duncan said last month.

Sales of new houses rose 8.9 percent to a record 1.228 million annual rate in March, the Commerce Department said late last month. Sales of new houses account for 15 percent of the market.

Sales of previously owned houses, which make up the rest, rose 5.7 percent in March to 6.48 million homes at an annual pace, the second-fastest rate ever, according to the National Association of Realtors.

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