Mortgage applications drop to 16-month low

U.S. mortgage applications fell for a third straight week, dragged down by a decline in home refinancings to a 16-month low, despite a dip in interest rates, an industry trade group reported Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Nov. 25 declined 1.8% to 624.1.

During the holiday-shortened week, borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.20% last week, down 0.06 percentage point from the previous week's 6.26%.

It was the second consecutive decline in the 30-year rate, the industry benchmark. However, the rate was substantially above its 2005 low of 5.47% in late June.

Analysts and economists say the steady climb in interest rates in recent months may have started cooling the housing sector. Lower loan demand, slower home price appreciation and growing inventory in recent months has many observers declaring a slowdown has arrived.

The MBA's seasonally adjusted index of refinancing applications dropped 6.3% to 1,484.3, falling for the sixth straight week, to its lowest level since late June 2004.

However, last week's rise in the seasonally adjusted MBA's purchase mortgage index by 0.8% to 476.2 nearly erased the previous week's 1.2% loss. That may indicate there is still some momentum in the sector.

"Homeowners are taking advantage of the rally by locking in still historically low long-term mortgage rates," said Bob Walters, chief economist at Quicken Loans, the largest U.S. online mortgage lender, as ranked by National Mortgage News.

"Short term rates are now equal to long term rates, and, unless the yield curve inverts and long term rates fall below short term rates, it is unlikely that long-term rates have much room to fall," he said.

The mixed picture on the housing sector was reflected in October housing sales figures earlier this week.

Sales of existing U.S. homes slowed in October and the inventory of unsold houses rose to the highest level in nearly 20 years, the National Association of Realtors said.

Sales of previously owned homes fell 2.7% from September's upwardly revised 7.29 million unit annual pace, and the drop would have been even larger if not for a surge in home-buying linked to Hurricane Katrina, it said.

However, sales of new U.S. homes shot up unexpectedly in October, climbing 13% to hit a record pace, according to data from the Commerce Department on Tuesday.

Fixed 15-year mortgage rates averaged 5.72%, down from 5.83% the previous week. Rates on one-year adjustable-rate mortgages decreased to 5.39% from 5.41%.

With ARMs, low initial payments have allowed borrowers to buy homes they may not have been able to afford with a fixed-rate loan.

But with interest rates rising steadily over the past few months, more consumers chose last week to lock in a fixed-rate instead of floating rate.

The ARM share of activity fell to 33% of total applications last week from 33.2% the previous week. ARM demand reached a 2005 high of 36.6% in late March.

Refinancings decreased as a percentage of all mortgage applications, falling to 39.1% last week from 39.9%, the MBA said.

The MBA's survey covers about 50% of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.