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Mortgage Applications Decline Despite Housing Up-Cycle

The expansion of the economy has fostered optimism within the real estate industry. However, while things are trending in the right direction, the housing sector has yet to gain the traction it so desperately needs. Proof of this so-called stagnation is evident in the most recent mortgage application data. Accordingly, mortgage application volume increased 7.3 percent over the course of last week. The move, however, followed a decline of exactly the same amount one-week prior. The fluctuation was, again, driven by refinance volume, which rose 13 percent – the same amount it fell the previous week. Essentially, mortgage application volume is heading nowhere fast.

Applications to purchase a home are equally stagnant, as they only managed to increase one percent over the previous week. On an annual basis, purchase applications are four percent lower, just as they were one week ago.

“You’re looking at the first time I can ever remember in the last 33 years where you had interest rates fall all year long in a up cycle, and mortgage purchase applications have had a negative year-over-year print every single week,” said Logan Mohtashami, a loan officer with AMC Lending Group in Irvine, CA.

According to the Mortgage Bankers Association (MBA), stagnation may be directly correlated to interest rates. As of last week, the average contract interest rate on a 30-year fixed-rate mortgage increased to 4.11 percent.

“There’s not really much to be said about this strength in mortgage rates apart from the fact that ‘it’s nice,'” wrote Mortgage News Daily’s Matthew Graham.

Meanwhile, despite favorable interest rates, Millennials are finding it increasingly difficult to fathom the idea of homeownership. Around the country, areas with the strongest job markets have some of the costliest homes. Moreover, areas with the most affordable homes lack a solid base of middle class jobs that attract workers. This is particularly concerning for an entire population banking on their college degree to get them into a new home. It is essentially a catch 22. Moving to an area with a thriving job sector will require purchasing a more expensive home, whereas those regions with poor job growth have the most affordable housing. Either way, it is difficult to afford a home.

Both college graduates and younger families have favored coastal cities. In fact, these populations appear to have a collective interest in cities like San Diego, New York, San Francisco and Seattle. After all: why not? Each of these areas hosts a solid middle-class and ample income growth potential. However, along with the benefits of a booming job sector, the majority of coastal cities are accompanied by prohibitively expensive housing. Having said that, the dream of homeownership is a distant one, even for those with seemingly comfortable incomes.

“This great mismatch is hurting middle class people who would like to be homeowners,” said Nela Richardson, chief economist at the real estate brokerage Redfin.

As a comparison, approximately 40 percent of the households in costal cities, the likes of which we have already mentioned, make more than $100,000 a year. Conversely, on a national level, that level drops to 22 percent.

Experts have attributed this trend to the lack of a proper economic rebound. An entire population of first-time homebuyers has been neglected for the better part of a decade. Their lack of participation within the housing sector is crippling, or at least a huge obstacle that needs to be addressed. There is no question that the housing sector would be in a much better position if Millennials were able to participate. Cities with the strongest job markets would grow even faster if more people could afford to live there.

While Millennials appear primed to reenter the housing sector sooner rather than later, there are two main factors contributing to their absence:

  • Tighter credit standards and underwriting.
  • Construction is running well below its pace from a decade ago.

Banks had to make a change in lending practices, as to prevent a repeat of past transgressions. However, new practices are even stricter than originally anticipated. A recent decision on forthcoming regulations governing mortgage lenders could help ease credit criteria slightly, but lending will not go back to the loose days of the last housing boom.

Fortunately, many regions boast affordable housing. Millennials will find comfort in the fact that they can afford 80 percent of the homes for sale in Akron, Ohio, and Rochester, New York, according to Trulia. Texas, on the other hand, has several cities that offer both a promising job sector and an encouraging housing market. Both Houston and Dallas have incredibly hot housing markets buoyed by jobs from the energy sector. However, Texas is the exception rather than the norm. Most of the regions with affordable housing do not coincide with promising job opportunities.

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