Home purchase loan demand up as rates hit record lows

NEW YORK (Reuters) - U.S. mortgage applications for home purchases rose for a second straight week, with demand at its highest level since early May as potential homeowners took advantage of record low interest rates, data from an industry group showed on Wednesday.

Demand for home refinancing loans, however, slumped for a fifth straight week as tight lending standards and a weak labor market prevent many homeowners from taking advantage of rock-bottom rates.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended October 1 decreased 0.2 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 3.0 percent.

The MBA’s seasonally adjusted purchase index, a tentative early indicator of home sales, increased 9.3 percent, reaching the highest level since the week ended May 7.

Jay Brinkmann, chief economist at the MBA, said the increase in purchase activity was led by a 17.2 percent increase in Federal Housing Administration, or FHA, applications, while conventional purchase applications increased by 3.6 percent.

“One possible driver of last week’s big increase in FHA applications was a desire by borrowers to get applications in before new FHA requirements took effect October 4th, which included somewhat higher credit score and down payment requirements,” he said in a statement.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said the housing market remains vulnerable to setbacks.

“Right now we are digging out of the very deep hole left behind by the first-time home buyer tax credits, which pushed sales forward, but plunged after expiration,” he said.

A view of a home for sale in Los Angeles in this February 24, 2010 file photo. REUTERS/Mario Anzuoni

“Data on pending home sales has been positive, but we are still at very low levels and until we get faster growth in employment we are not going to see a housing market recovery,” he said.

The National Association of Realtors earlier this week said pending sales of previously owned U.S. homes in August rose to a four-month high.

“Excess inventory is weighing heavily on the housing market and it will take time to resolve that problem,” Gault said.

The MBA’s seasonally adjusted index of refinancing applications decreased 2.5 percent.

“We have record low interest rates, but many people cannot take advantage of them because credit is tight and many people are unemployed,” he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.25 percent, down 0.13 percentage point from the previous week. That is a lowest level in the survey, which has been conducted weekly since 1990.

Interest rates were also below their year-ago level of 4.89 percent.

The drop-off in home loan refinancing demand does not bode well for the flailing U.S. economy as this activity typically encourages an increase in consumer spending.

By lowering monthly mortgage payments, lower rates may also help some homeowners avoid default and foreclosure if their credit is good enough.

The MBA said fixed 15-year mortgage rates averaged 3.73 percent, down from the previous week’s 3.77 percent, a record low. Rates on one-year adjustable-rate mortgage, or ARMs, increased to 7.11 percent from 7.04 percent.