Wells Fargo & Co (WFC), D.R. Horton, Inc. (DHI), Toll Brothers Inc (TOL): Why People Are Concerned About Housing

Page 1 of 2

Now that mortgage rates have come off their historic lows, commentators are beginning to proclaim that the end of the housing recovery is nigh. A recent headline from Yahoo’s Daily Ticker says it all: “Housing Bubble Deflated by Rising Rates.”

But like most things published on the Internet, the truth is much more nuanced. In this case, when you take all of the various data points into consideration, the weight of the evidence suggests that the housing recovery is still on track.

Wells Fargo & Co (NYSE:WFC)

Why people are concerned about housing
There’s no question that mortgage rates are higher — and dramatically so. Since the beginning of May, the average rate on a 30-year fixed rate mortgage has shot up at an unprecedented pace, going from 3.35% all the way up to 4.51% today, according to Freddie Mac’s Primary Mortgage Market Survey.

There’s also no question that this has had a significant impact on the mortgage market. Data collected by the Mortgage Bankers Association reveals that application volumes have dropped by 53% over the same time period.

Beyond this, it’s similarly true that the fall in application volume is weighing on the nation’s largest banks. Wells Fargo & Co (NYSE:WFC), the biggest domestic mortgage originator by far, has said it’s laying off 2,300 employees from its mortgage department because of falling demand.

On top of this, the Commerce Department reported last week that new home sales fell in July by 12.4% on a seasonally adjusted annual basis compared to June. And just this week, the National Association of Realtors announced that pending sales of existing homes dropped on a sequential basis last month by 1.3%.

But do these things — which admittedly aren’t good news — portend an end to the housing recovery? Not necessarily.

Here’s the good news
While the data about mortgage volumes is certainly ominous, the concern still appears to be exaggerated — at least at this point. This is because the majority of the 53% decline in applications is related to refinance applications and not purchase-money applications — the latter have a direct impact on housing while the former do not.

Page 1 of 2