In addition to continued retrenchment in housing construction (and likely sales as we will see next week) mortgage applications absolutely plunged again this week. According to the latest estimates from the Mortgage Bankers Association, their application index fell 9.2% from the prior week. That’s a pretty large drop reminiscent of the worst financial days last fall.

Refis, as has been usual, took the brunt of the decline, dropping an astounding 12.7%. But applications for home purchases fell nearly 5% too, boding fairly poorly for future real estate conditions. Week-to-week changes in applications levels are volatile, to be sure, still the scale of this week’s drops are well beyond that (especially when seen as part of the recent trend).

We are supposed to believe that this is “normal” or something passing close to that. Interest rates did rise, even in mortgage markets, but that a 2 basis point increase in rates should or would produce such mayhem? An increase in the average mortgage rate from 4.34% to 4.36% apparently had potential borrowers running for the hills.

“Interest rates increased relative to the previous week as incoming economic data continues to suggest a pickup in the pace of growth,” said Mike Fratantoni, MBA’s chief economist.

Factually, rates did rise slightly but the curve also continued to flatten. That would seem to countermand the credentialed economist’s interpretation, as would the data from mortgage applications. Is it more likely that a rounding error in mortgage rates unleashed havoc, or that a weakening economy coupled with a growing realization about housing (as it is, not as it is proclaimed) have convinced many to rethink their posture toward indebtedness?

These very indications are an ongoing series of signals that loudly protest the fragile state into which these “markets” situate. The incongruity is astounding, yet we are supposed to believe it a sign of re-awakening and renaissance. I have no doubt that all the DSGE models, as with their GARCH and TVP-VAR brethren, see exactly that. But I think that a deeply profound statement about the models far more than anything else.

 

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