Why we’re not afraid of the low mortgage application rate

March 10, 2014

by Mike Simonsen


Housing bears are roaring about the volume of mortgage applications. The rate of purchase applications is a leading indicator of demand for housing. Demand for mortgages are down, demand for housing must be down, and that’s bad. Right?

Apparently not. Demand for mortgages is down. But the data keep telling us that demand for housing is not subsiding (as of the first week of March, 2014.) Specifically:

  • All cash deals are high and climbing. 47%(!) of home purchases were all cash in December up from 27% a year ago. Here’s the important point on this phenomenon: LESS leverage is HEALTHY for a market. This is a good thing, from a price stability standpoint. Bubbles are financed with too much leverage, not too little.
  • Even if mortgage demand is weak, demand for housing is still very high. Housing demand, as measured by some of our proprietary metrics, is a only little softer than last year at this time. But last year’s crazy demand levels resulted in a huge 15% price rally. Based on real-time market measurements, Altos Research forecasts home prices to climb 10-12% in 2014. Housing demand has not subsided.
  • Interestingly, contrary to most casual observers’ opinions, the big institutions are not driving the cash purchases. Even with the tens-of-billions of dollars in investment firms like Blackstone, Colony, and Waypoint, that financial power amounts to around just 5% of the overall home purchase market. Buyers are cash-rich consumers and small-time investors buying a second or third property.
  • Interest rates are actually falling. What?! Yes, after the spike a year ago, rates have drifted lower again. This implies that the bull market for US real estate has room to run when leverage increases again.
US 30-year mortgage rates
30-year fixed mortgage rates, from samples across the Altos 20-city composite. Mortgage Interest rates peaked in July 2013 and have been bumping lower since.


So what to make of the low rate of mortgages in US Housing? I attribute it three factors:

  1. Cash-poor consumers are afraid. They have been beaten into assuming they can’t get a loan. And with competition for the low inventory so intense, they’re not even trying.
  2. I suspect this cash-heavy real estate investment phenomenon is a symptom of high uncertainty and mistrust in the global financial system. Americans are afraid of the country’s financial condition and an un-leveraged, income-producing asset is a wonderful thing to have in times of trouble.
  3. It also seems to be tied with the income growth disparity in this country. First time homebuyers may be losing out to small, cash-rich, investors.


Low mortgage application volumes may be indeed be bearish for the long term outlook for the housing market. It may signal fear of the global financial system. But for the time being, housing demand is strong and we’re looking at another bull year for home prices.


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