Demand for Home Loans Reaches 4-Year Low

In a new sign of the continued deterioration in the housing market, applications for home loans plunged to a four-year low last week.

Mortgage loan applications dropped to their lowest level since May 2002, according to a weekly survey of lenders conducted by the Mortgage Bankers Association, a trade group.

The group reported its market composite index, a measure of mortgage loan application activity, fell to 527.6. At the peak of the refinancing market in May 2003, the index hit 1,856.7.

Lenders "are seeing their volumes down, not just for purchases but also for refinancing," said Jay Brinkmann, a financial economist with the association.

Housing experts say the decline in loan applications is a predictable effect of federal government efforts to cool inflation by raising interest rates. Higher interest rates affect home purchases and housing affordability because they increase monthly mortgage payments.

According to an analysis by the National Association of Realtors, each percentage point increase in interest rates knocks about 3 million potential buyers out of the housing market, including about 300,000 to 350,000 people considered likely buyers.

The higher rates -- 30-year, fixed-rate mortgages are nearing 7 percent, up about a percentage point from a year ago -- have marked a sharp shift in the industry after several years in which interest rates hit record lows. In June 2003, rates on 30-year loans fell as low as 5.21 percent, as measured by Freddie Mac.

Home sales and refinancings hit historically high levels in 2005, with more houses changing hands than in any previous year, making the decline in 2006 all the more dramatic.

"It's pretty bad," said Christopher Cruise, who trains mortgage brokers and is based in Rockville. "The problem is that the high was so high and the low is so low. Now it's not just the end of the refinancing boom, but people aren't buying either. There's been a real drop off in purchases."

Fewer people are also entering the mortgage brokerage field. Cruise said attendance at some of his classes has dropped by 50 percent, and he has canceled some classes for lack of interest.

"It's causing some pain for some people," Brinkmann said, adding that declining loan volumes are cutting into lender profits. He said some mortgage brokers are likely to leave the business.

"Some will go off to a different field," Brinkmann said. "They may need to go out to find a different line of work to support their lifestyles if the income is no longer there."