As almost every market pundit has noted, things have improved for housing on the margin as the rate of decline in home prices continues to slow. As we are fond of saying however, "better than bad" is very, very different from "good" and one negative factor that continues to weigh heavily on the housing market is the continuing sharp declines in the number of Americans applying for mortgages as measured by the weekly MBA index (see chart below).
Potentially more concerning, the number of refinancing applications is falling at an even faster pace than the aggregate, with the percentage of the total declining from almost 90% at the start of the year as option ARM "victims' and underwater speculators tried to take advantage of falling rates to less than 50% in the most recent weekly figures (see chart).
With rates holding steady at historic lows and home prices indicating signs of a bottom on the horizon, some observers might expect that the pace of these refinancing applications would be more resilient. The reality is, however, that many people are only willing to increase the size of their debt when they are not increasing their leverage. In other words, with residential real estate values rising it is easy to justify an increase in the absolute debt levels for home improvement or other purposes. In a market environment where prices continue to trend downward, regardless of any signs of bottoming or attractive financing rates, homeowners are not motivated to increase their debt to equity ratio. In other words, refi applications continue to decline for the same reason that we are short the XLY: US consumer confidence has peaked for the intermediate term.
As we sort the factors driving US consumer spending, Refinancing applications will remain a data point on the margin that we follow closely.