Anyone who thought the housing market might be able to continue its positive trend without the home buyer credit got a swift dose of reality today. The Mortgage Bankers Association reported that mortgage applications for home purchases fell off a cliff, declining by 27% last week to a level not seen since May 1997. Clearly, the housing market is already missing the home buyer credit.
First, for a little perspective, here's mortgage applications for new purchases since 1990:
The red line is the index, and the bright green line shows its level during the week ending May 14th. The chart shows how incredibly high applications were in 2005, and how low they dropped last week, after rising significantly, with consumers anticipating the credit's expiration. The index fell 34% from the week ending April 30th through the week ending May 14th -- in just two weeks.
How can we be sure that the home buyer credit caused this huge drop? No other variable appears to be responsible.
On the supply side, little has changed. There's still plenty of housing inventory. Even though existing home sales were likely relatively strong in April given the credit, foreclosures are still occurring in high numbers. As a result, the housing inventory probably declined only a little. Prices haven't moved much either.
On the demand side, the other factors that might encourage buyers haven't changed much either. Interest rates still remain relatively low: in fact, they decreased to 4.93% this week from 5.21% a month earlier, according to Freddie Mac. The economy hasn't suddenly worsened in the past few weeks, as jobless claims have been declining over the past few weeks. Banks also haven't experienced any shocks that would have caused a drastic decline in credit.
That basically just leaves the home buyer credit as the chief cause. And history supports this theory. In November, when the credit was extended, new purchase mortgage applications also plummeted, then to a 10-year low. At that time, potential buyers realized they no longer had to rush, so they put off their buying until the spring. This time around, the drop was even more significant, because even more demand was pulled forward while the credit was in effect.
There's little doubt that last week's drop in mortgage applications for home purchases foreshadows what we can expect over the next few months. The home buyer credit likely soaked up most of the home buying demand out there. At this point, the American consumer might be experiencing home buying fatigue. If sales decline to very low levels -- and this data indicates that they probably will -- then that will result in foreclosures increasing housing inventory further. That could cause a decline in home prices, which had just begun finally rising again.