Big Drop-Off in U.S. Mortgage Applications Spells Trouble for Housing Market Again

By: InvestmentContrarian

Sasha Cekerevac writes: Regular readers of this column are fully aware that for the past year I have been calling for higher levels of interest rates. I’ve also stated that higher interest rates will have an impact on the housing market and related stocks.

Well, now we are starting to see my forecast come to fruition, as many mortgage-lending operations are seeing the negative impact of higher interest rates on the levels of mortgage originations.

At a recent conference, Wells Fargo & Company (NYSE/WFC) stated that it expects mortgage originations (new mortgages and refinancing) will drop approximately 30% in the third quarter versus the second quarter of this year.

While many market experts have held the belief that the housing market can continue its recent upward trajectory regardless of the increase in interest rates, I continue to raise my concerns, stating that my analysis continues to lead me to conclude that this rise in rates will indeed have an impact on the housing market.

With Wells Fargo announcing a 30% drop in mortgage originations over just one quarter, that is a significant decrease over a short period of time. JPMorgan Chase & Co. (NYSE/JPM) actually expects to lose money during the second half of this year in its mortgage origination business, as mortgage originations are down 40% from the first half of 2013.

While the housing market benefited greatly from the low levels of interest rates over the past couple of years, many of the financial companies have expanded significantly in this sector. I think that we are going to see a reverse now, as firms begin to reduce the number of workers related to the housing market sector.

We already saw Wells Fargo reduce its staff by approximately 3,000 jobs in its mortgage business this summer. I think it’s likely that more financial firms will continue to reduce staff in businesses related to the housing market, as higher interest rates are here to stay.

What does this mean for you as an investor?

Obviously, large financial companies such as JPMorgan have many business sectors, and the housing market is just one subset of their revenue base. However, companies that are more exposed to the housing market, I believe, will be greatly affected by higher interest rates.

Don’t forget: the stock market is a forward-looking mechanism. Investors are estimating future levels of revenues and earnings. What I would look for when it comes to stocks to avoid, or perhaps even sell short, are firms that have a significant exposure to the housing market but no additional lines of revenue or other business segments.

While long-term interest rates won’t continue rising at this pace forever, since the Federal Reserve is anchoring the short-term interest rates and that differential can only widen so much, the higher interest rates will begin to negatively impact the housing market and businesses associated with that sector.

I believe that many investors are overly optimistic about the potential for revenue growth in many companies associated with the housing market, and I would certainly urge caution going forward.

This article Big Drop-Off in Mortgage Applications Spells Trouble for Housing Again was originally published at Investment Contrarians

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

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