U.S. Home Sales Fall 5.5% in October

Freddie Mac reported Thursday that the average 30-year fixed mortgage rate fell to 7.11%, down from 7.18% last week. The fourth straight weekly decline came on the same day that the National Association of Realtors reported a 5.5% drop in October sales of previously owned homes. Sales ran at an annualized pace of 3.75 million after adjusting for normal seasonal swings, the slowest since August 2010, according to the Associated Press.

The two reports cover different stretches of time. October closings reflect deals that were often arranged weeks earlier, while Freddie Mac’s survey draws on recent purchase applications. A slightly cheaper loan may help a buyer qualify or bring a monthly payment within budget. But the average rate was 6.24% a year ago, so even after a month of declines, financing is still more expensive than it was then. We would want to see more purchases close before calling this a recovery in mortgage demand.

For the mortgage originators in the Fly High universe, the distinction matters because a better rate quote only helps earnings if enough borrowers follow through. Originators can earn fees and make money selling the loans they close. When fewer loans go through, there is less revenue to cover the cost of running the lending operation. Lower rates can also attract some homeowners who want to refinance, particularly those who borrowed at higher rates recently. The incentive is smaller for borrowers who already have cheaper loans, especially once they factor in the cost of refinancing.

There is a different effect for businesses that also service mortgages. They collect payments and earn fees while the loan remains outstanding. When a homeowner refinances, the old loan is paid off and its servicing fees end. A lender that writes and services the replacement mortgage may recover some of that income, but the earnings effect depends on how many borrowers it keeps and what it earns on the new loans.

For now, cheaper quotes offer some relief, but October’s sales figures leave little basis for expecting a broad lift in earnings that support dividends. In the next round of mortgage results, we’ll look for more closed loans and better lending profits after costs, alongside evidence that servicing income is holding up.

Sources

• Freddie Mac Primary Mortgage Market Survey, November 12
• Associated Press reporting on October existing-home sales

This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.