Mortgage Applications Rise, Refinancings Drop

NEW YORK – U.S. applications for mortgage loans to buy homes, an indication of future sales activity, rose while refinancings continued to trickle lower last week, the Mortgage Bankers Association (search) said on Wednesday.

The MBA, an industry trade group, said its purchase index, a measure of demand for loans to buy homes, rose 2.2 percent to 459.8 in the week ended May 28, nearly unchanged from a year ago when rates were at historic lows.

"People are getting in (to the housing market) while the getting is good," said Drew Matus, financial markets economist at Lehman Brothers.

The MBA's refinancing index, a gauge of requests for mortgage loan refinancings, however, fell by 6.6 percent to 1,583.6 from 1694.9 in the prior week.

Average interest rates on 30-year mortgages fell 0.02 percentage point to 6.24 percent, the MBA said. This contract rate is up 1.11 percentage points or 111 basis points from a year ago, effectively stamping out refinancings but remaining low enough by historical standards to encourage home buying.

"A 6.25 percent mortgage is not as good as 5.25 percent but it is still very affordable by historical standards," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. "It feels to me we've gone beyond the point where you are just capturing people who were on the fence (waiting for lower rates). We have strong underlying demand."

The MBA's market index, a measure of overall lending activity, fell 1.2 percent to 624.6 from 632.4 in the prior week, dragged lower by the decline in refinancings.

The strength in demand for loans to buy homes comes as demand for refinancings ebbs, offering little surprise for market participants, who have expected a rush to purchase before mortgage rate rise higher.

"There is some sense home sales are holding up because people are trying to beat the Fed - get into a house and lock in a mortgage rate before the Fed hikes rates," said Chris Low, chief economist at FTN Financial Inc. (search) on Tuesday before the report was released.

Expectations of higher interest rates have hung over the market in recent weeks, especially after a strong April employment report.

Last week, Federal Reserve (search) Board Governor Ben Bernanke pointed out that "an alternative to gradual policy adjustment is what an engineer might call a bang-bang solution, or what I will refer to today as the 'cold turkey' approach."