Mortgage applications index falls 0.9 percent

Higher interest rates make refinancing less appealing

August 14, 2005|By BLOOMBERG NEWS

An index of U.S. mortgage applications fell 0.9 percent last week to the lowest level since the end of May, as rising interest rates made it less appealing for homeowners to refinance, a survey of lenders showed last week.

The Mortgage Bankers Association's measure of home purchases and refinancing decreased to 745 in the week ended Aug. 5 from 752.1. Refinancing declined 3.3 percent.

Mortgage rates that have increased in five of the past six weeks are deterring refinancing and may begin to put off potential homebuyers, economists said. Last week, the Federal Reserve raised its benchmark interest rate a quarter point for a 10th straight time to 3.5 percent.

"We do see that the housing market has peaked," said John Silvia, chief economist at Wachovia Corp., in an interview in Washington. He attributed the slowing market to "a little more caution in lending institutions, a little higher short-term interest rates, a little more pricing-out of people from the marketplace."

The mortgage bankers group's gauge of applications to refinance existing mortgages fell to 2,176.5, its lowest since early May, from 2,250.3 the week before.

"Rising long-term yields from the trough in the second quarter are likely to eventually take its toll on the refinance market," said Mike Englund, chief U.S. economist at Action Economics LLC in Boulder, Colo. "It wouldn't be surprising to see a moderation in refinance activity as the year unfolds."

Applications to buy homes rose 0.9 percent last week to 498.8 from 494.5, the association said. In the week that ended June 10, the measure was at a record 529.3.

Sales of previously owned homes are expected to rise 2.9 percent to 6.98 million this year, exceeding last year's record of 6.78 million, while purchases of new homes will probably rise 4.8 percent to an all-time high of 1.26 million, a Realtors' group said.

The share of applications to refinance decreased last week to 40.7 percent of all mortgage applications from 41.7 percent the previous week.

The share of applications for adjustable-rate mortgages increased to 29.7 percent from 28.5 percent of total applications the previous week. With short-term interest rates rising more than longer-term rates, the share of adjustables has fallen since March, when the share was at a high of 36.6 percent.

"As rates increase, more consumers opt for the alternative programs such as ARMs to keep their monthly payments low," said Anthony Hsieh, president of, a mortgage-provider Web site.

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