The headline writer at USA Today got it wrong today. We don't know that "home loan demand surges as interest rates drop." The article reports on a large increase in the Mortgage Bankers Association weekly mortgage application index. I am usually a big fan of this index as an up-to-date source of data on the current state of the housing market. However, recent numbers are likely skewed upward for two reasons. First, while the association gets data from close to half of all mortgage lenders, subprime lenders are under-represented in the index. This means that an important segment of the mortgage market that is contracting rapidly is not getting weighted properly. In addition, some applicants who might have otherwise gone to subprime lenders not included in the survey, are now going to members of the MBA, because the subprime lenders have shut down. The other reason why the applications number is likely skewed upward is that mortgages are being denied with far greater frequency than was the case a year or even six months ago. While the overwhelming majority of applications were approved last year, the percentage of denials is far higher now. This means that the same number of applications corresponds to fewer mortgage actually being issued. In principle we can adjust for this change if we have current data on the success rate of applications, but lacking this information, we really can't make good comparisons between periods in which the success rate of mortgage applications is likely to differ substantially.
--Dean Baker
