“As a result, refinance applications dropped sharply to the lowest level in over a month.”

Applications to buy a home also dropped 5 percent week-to-week, indicating a still weak and rate-sensitive purchase market. One third of buyers in today’s housing market use all-cash. Many in the housing industry complain that it is not the rates but the availability of potential borrowers to obtain financing that is holding the market back from a more robust recovery.

The chairman of the National Association of Home builders says that while his cohort is feeling more confident about their business, “overly stringent lending standards” are holding back a more robust recovery.

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Mortgage rates have been below 4 percent since May of 2012 and refinance volume has surged accordingly. Those refinances, many of them under the government’s Home Affordable Refinance Program (HARP) for underwater borrowers, have helped to fuel consumer spending and have likely kept many borrowers from defaulting on their loans.

The big drop in refinances after such a small move up in rates indicates that the slightest move, up or down, can really change activity. The hope, of course, had been for rates to continue moving down.

“A lot of money has been spent between OT [Operation Twist] and QE3 for very little incremental reward,” notes Peter Boockvar of Miller Tabak. “The true cost, yet to be determined, will of course occur when the likely market forced exit begins.”

If mortgage rates rise markedly in 2013, the housing recovery will undoubtedly take a hit. The recovery in housing began with all-cash investors, but owner-occupants are quickly moving in.

“Fannie Mae, Freddie Mac and the FHA financed a record $31.2 billion in so-called conforming jumbo mortgages during the third quarter of 2012,” according to a new Inside Mortgage Finance ranking and analysis. “Business in conforming jumbo loans – defined as mortgages on one-unit properties that exceed $417,000 – rose 29.6 percent from the second quarter and represented the highest quarterly volume for the agencies since emergency loan limits went into effect back in 2008.”

Unfortunately many buyers are either too young or too forgetful to realize that mortgage rates are incredibly, historically low, despite slight moves up week-to-week. The good news is in the near term is that when some buyers see rates tick up, they jump into purchase more quickly, for fear the rates will keep going up.

Article source: http://www.cnbc.com/id/100327898

These latest numbers fly in the face of rising home builder optimism and a huge run on the stocks of the public builders. Some analysts, however, have been warning that this recovery is fragile at best, given other factors in the economy, specifically lackluster job growth and poor consumer sentiment.

“Builder stocks have continued to outperform the market as demand has remained strong into summer; also, earnings and the next few macro data points should be positive,” wrote analysts at Deutsche Bank earlier this week. “However, we think downside tail risk is mounting for 2H12. It shouldn’t take more than muddle-through economic growth for housing recovery to continue, but the risks are that even that doesn’t happen or it happens unevenly against tenuous investor optimism.”

Several home builders reported big jumps in new orders this spring, but those orders did not translate into pricing power for the market. Prices of new homes fell 3.2 percent in June after several months of gains.

Single family housing starts rose 4.7 percent in June from the previous month to a four year high, but they are still running at about one third the historical average volume. Inventories of new homes for sale rose to 144,000, representing a 4.9 month supply, but that is still historically very low.

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