Goldman Sachs
But in recent years mortgage applications have been flat while home sales have risen, according to Hui Shan at Goldman Sachs.
There are three factors that explain the disconnect between the two indicators:
- "A changing relationship between mortgage applications and originations:" Not every mortgage application is approved and ends in an origination. "The pull-through rate, which is the origination to application ratio, can vary considerably over time," according to Shan. The pull through rate has risen from 2007 to 2012 because only those serious about home purchases and those that could afford it began to apply for mortgages, as opposed to the period from 2002 to 2007 when loose credit conditions drew in marginal borrowers.
- "Shifting mortgage market landscape affects the reliability of the MBA application index:" The market share of the four large banks, Wells Fargo, Chase, Bank of America and Citi has fallen from 50% of all residential mortgages in 2011, to 31% in the first half of the year. This could skew the survey that the MBA index is based on. "In fact, the HMDA data show that purchase mortgage applications increased 10% from 2011 to 2012 whereas the MBA purchase application index only increased 3% during the same period."
- "Cash transactions may stay elevated even as investor purchases decline:" Tight lending standards continue to cause the share of cash transactions to stay close to peak levels, even as their share in distressed sales continues to fall. "Because low-FICO homebuyers are more likely to rely on mortgages to finance home purchases, an increasing number of discouraged low-FICO borrowers contributes to elevated cash transactions."
Shan writes that for these three reasons we should also be more cautious when forecasting home sales based on changes in the mortgage applications index.