Interest Rates Flat and Mortgage Applications Down 10.9%

by Tim Krulia – Private Money Blueprint CFO

As part of our quest here at PMBP to give you the single best resource on the financial aspects of growing your real estate investing business (aka, we help people find private money quickly, easily, and abundantly)… here’s an article I found that raises an interesting question about the relationship between interest rates and mortgage applications.

This week’s article is a little fun because it also comes with a WSJ.com video interview of Dave Blitzer, Chairman of the Index Committee at S&P. The article’s title is “Week-to-week mortgage applications down 10.9%: MBA, Interest rates charged on fixed-rate home loans virtually flat last week,” written by MarketWatch reporter, Amy Hoak.

Just to make sure we’re on the same page, the MBA (as referred to in the title of the article) in this case isn’t referring to a Master’s Degree in Business Administration; instead, it is the Mortgage Banker’s Association.

“The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., MBA invests in communities across the nation by ensuring the continued strength of the nation’s residential and commercial real estate markets; expanding homeownership and extending access to affordable housing to all Americans and supporting financial literacy effort.”

– Source: http://www.mbaa.org/AboutMBA

They also have a pretty kickin’ conference every year that our company used to attend when I was working in the mortgage business. It’s an excellent arena to learn about the cool inside scoop of what’s happening in that industry.

The MBA is reporting something pretty interesting from an economics perspective in the article. The number of applications taken in a week gives us a barometer for demand in the market for mortgages. If applications increase, we know that there are more peeps out there looking to buy or refinance their houses (increased demand), and of course if applications fall, we know that demand lowered.

Normally, we look at interest rates and see a consistent inverse relationship between interest rates and demand. As an example, if interest rates rise, we would expect demand to fall because it becomes more expensive (thus less attractive) to borrow money. Interest rates haven’t really fluctuated up or down so we would expect applications to also be consistent. The nuts and bolts of the highlighted article reports that interest rates have been flat but there’s been a drop off of mortgage apps by 10.9%!

How can that be you may ask? Well that’s the question the video interview attempts to ask. Go ahead and check it out here. Let me know what you think by leaving a comment on the blog.

Let me know if you think that a big part of this anomaly has to do with the shortage of supply of people out there that can qualify for a mortgage. I bet there’s a huge gaggle of Americans who want to buy, have tried to apply for a mortgage, were straight told to go fly a kite and have quit trying.

In theory, if there were a perfect supply of properties and demand of people looking to buy them, then what happens when there’s an increased number of folks that can’t qualify………..what makes up that gap? Well, I’d assume that the result is an oversupply of properties for sale, which drives the prices down of that commodity. The lower prices are what we as investors like to hear because it gives us a continued opportunity to buy better deals.

This anomaly in the market that was reported in this article is great news for the investor that uses private money because it leads to better deals to be had & since we are independent of the banks, they don’t hold us back from going ahead and gobbling them up!