The Mortgage Bankers Association (MBA) released its latest Weekly Mortgage Applications Survey for the week ending 8 January, 2021 on Wednesday. Compared to the previous week, the latest published data revealed a 16.7% increase in the Market Composite Index. Notably, there was a 20% increase in the Refinance Index.

The MBA is a member-based non-profit organisation that is the US’s national association representing all aspects of the real estate finance industry. The Weekly Mortgage Applications Survey, which has been in operation since 1990 and whose indices have been leading indicators of the housing and mortgage finance market, is conducted each week by the MBA to aggregate and comprehensively analyse mortgage application activity in the country. The MBA’s Market Composite Index consists of seven different indices and acts as a measure of the mortgage loan application volume. One of the seven indices, the Refinance Index, covers all mortgage applications made to refinance an existing mortgage.

This 20% jump in the Refinance Index was the highest level seen since last March, with the volume being 93% higher than a year ago. This growth coincides with an increase in the average 30-year year fixed-rate mortgage interest in addition to the 10-year US government bond yields, an important indicator of broader investor confidence, rising above the 1% mark for the first time since spring last year. While January is notorious for being a busy time for brokers, it is counterintuitive that a boom in refinance activity occurs when mortgage rates are on the rise. This phenomenon is likely due to borrowers thinking they need to act quickly and capitalise on the current rates before they increase any further. The 15-year fixed-rate, however, reversed this trend and fell to a record low of 2.39%.

Joel Kan, the Associate Vice President of Economic and Industry Forecasting at MBA, opined that the potential additional fiscal stimulus expected from the incoming administration and the rollout of vaccines improving the general outlook have contributed to driving treasury yields and interest rates higher. Investors are also expecting more spending announcements not long after the new US government takes office on 20/01/2021. Due to these envisaged measures, a boost in economic growth, inflation, and interest rates are to be expected. When this happens, mortgages will get more expensive. The inflation seen in December in the US was commensurate with the prediction of economists.

In the midst of all this, Goldman Sachs’ Chief Economist, Jan Hatzius, said that these developments might cause a pullback in stock prices in the short term. This is despite stock prices only recently hitting a record high. The logic he employed follows the reasoning that the mere prospect of higher interest rates is often enough to lure government bond investors into selling some of their holdings to finance the purchase of new, higher-returning bonds. This would push bond prices down and yields up. Since the US government bond yields represent an important benchmark for all global bonds, companies are likely to see the interest rate on their debts rise. This would cost companies more to repay their debt, thus straining their finances. This would then trickle back and eventually hurt their share prices. However, despite this potential short-term pullback, Hatzius is positive about the health of US stocks in the long term.

It is important to note that the marked 16.7% increase in the Market Composite Index was on a seasonally adjusted basis. This means that a rate adjustment was applied to the collected data to remove any seasonal variation. Since real estate finance data has been affected by seasons, employing a seasonal adjustment helps make more accurate comparisons between different time periods. On an unadjusted basis, the Market Composite Index saw a whopping 69% increase from last week.

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