Housing Index Offers Hope For Rebound

A newly released index of mortgage activity offers a glimmer of hope that the sagging market for housing could soon rebound.

The index, calculated by the Mortgage Bankers Association of America, measures the volume of applications for loans to buy houses. Since mid-September, it has climbed more than 8%, attaining its highest level since May.

Economists said the rise reflects consumer enthusiasm about the lowest mortgage rates since the late 1970s.

The index, which has been calculated for two years but only recently been available publicly, generally foreshadows changes in home sales by one or two months. (See A New Leading Indicator?)

"This is a little bit of good news," said David Berson, chief economist of the Federal National Mortgage Association. "It's an indication that sales are starting to turn around."

Rise Is Expected

Mr. Berson said home sales are likely to rise this month, and probably were up in October. Data on October home sales will not be available until the end of this month.

However, Mr. Berson and others cautioned that housing still has a tough battle to overcome the effects of high unemployment and low consumer confidence in the economy.

In fact, actual sales of new homes in September plunged 12.9% from August, the largest decline in 2 1/2 years. Sales of existing homes also fell steadily in July, August, and September.

Alarm at Decline

The declines were viewed as alarming by many economists who had been counting on housing to lead the country out of recession.

The Mortgage Bankers Association began calculating application levels in January of 1990, working from a weekly survey of 17 mortgage banking companies.

While the index's track record is still short, Mr. Berson says the measure may well be a useful forecasting tool.

"It seems to be a pretty good leading indicator of where sales are moving," he said.

The predictive powers of the measure are easy to understand. Home sales generally do not close until 30 to 60 days after a buyer submits a mortgage application. Sales of existing homes, the largest component of total sales, are reported largely on the basis of closings.

The index proved to be right on the mark when it rose in January: A four-month rise in total home sales began in February. In April, the index turned down - and home sales followed suit in July. That lag was somewhat longer than usual.

Though the index points accurately to a directional change in home sales, the correlation between applications and sales is not perfect.

"It would be nice if we could calibrate percentage changes in our index with levels of home sales, but as yet we are unable to do that," said Richard Peach, deputy chief economist for the Mortgage Bankers Association.

Exceeding the Benchmark

For the week ended Oct. 25 - the latest reading - the index stood at 101.4, up from 93.5 the week ending Sept. 13. A reading of 100 corresponds to the application volume of March 1990.

A sister index that measures applications for refinancings has shot through the roof. It stood at a stunning 575.5 in late October, more than double the level of early September. This index, too, is calibrated against a base of 100 established in March 1990.

In another bullish sign for housing, a recent survey by Great Western Financial Corp. found that realty brokers in 18 states see better times ahead for their markets.

Realty Brokers Optimistic

On a scale of 1 to 10, the brokers rated their confidence in their markets as 7.4 for the third quarter of 1992, up from 5.6 in this year's third quarter.

The brokers cited low interest rates, "more realistic" pricing of homes, and slightly improved consumer confidence, Great Western said.

Great Western, based in Beverly Hill, Calif., is the nation's second-largest thrift company. It conducted the survey in the states that make up its own market, interviewing 489 brokers over six weeks.

Brokers in the Midwest were especially upbeat about their markets, Great Western said. These brokers rated their confidence in next year's market as 7.8, up from 6.4 in the third quarter of this year. [Chart Omitted]

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