Reading The MBA Mortgage Purchase Index

The MBA Mortgage Purchase Index is a weekly measure that tracks the volume of nationwide mortgage loan application activity. It is based on a sample of approximately 75% of U.S. mortgage activity, including new loan origination and refinancing for single-family homes. The survey is a well-established measure of U.S. residential mortgage applications, having been conducted weekly since 1990, and it serves as a forecast of future housing construction activity. It is released by the Mortgage Bankers Association (MBA) every Wednesday at 7 am EST. MBA is the national association representing the real estate finance industry.

What It Isn’t

The name “Mortgage Purchase” is a bit of a misnomer. The MBA Mortgage Purchase index does not measure the number of homes purchased or built. Neither does it track the number of mortgage loans closed. In fact, there are no guarantees that the mortgage applications the index tracks will be approved or will result in purchase activity. Despite the naming confusion, the index is a useful tool for investors.

Insights for Investors

The MBA Mortgage Purchase Index is a leading indicator of home sales, serving to forecast home buying four to six weeks into the future. When consumers are purchasing homes, they are also purchasing just about everything else. When they aren’t purchasing homes, the economy often finds itself in trouble. The collapse of the housing market is one of the most significant economic data points associated with the Great Recession of 2007 to 2009.

While a single reading of the Mortgage Purchase Index provides only a snapshot, as the data is presented as a percentage increase or decrease from the previous week, the four-week moving average and other long-term data points provide clear indicators of trends in the housing market. For investors, these trends provide insight into a variety of investment opportunities. Keeping in mind that a significant percentage of homebuyers pay in cash, the index understates the market’s strength. According to Goldman Sachs Global Investment Research, as of August 2013, almost 60% of homebuyers purchased their property with cash. Investors can use the data provided by the index to gain insight into a variety of investment opportunities.

  • Housing Stocks

One of the most visible and obvious investment opportunities related to the index is the housing industry. When consumers are purchasing homes at a record pace, stock prices for homebuilders rise. Investors can seek to benefit from this by purchasing shares of big home building companies such as D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), NVR, Inc. (NYSE:NVR), Beazer Homes (NYSE:BZH), Toll Brothers (NYSE:TOL) and a host of others.

  • Banking Stocks

Lenders also benefit when consumers are buying homes. Lenders actually use the index to gauge whether they are getting their fair share of mortgage applications, given overall application activity. A lender picking up a healthy share of the mortgage market is likely to be an industry leader.

Investors can benefit from the data, too. Identifying market leaders among the companies providing both original loans and refinancing activity can present investment opportunities to purchase shares in banks like CitiGroup (NYSE:C), Bank of America (NYSE:BAC) and J.P. Morgan (NYSE:JPM). Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC), the two quasi-public mortgage companies that buy residential mortgage loans, are also publicly traded, but they are not as appealing as the private firms due to concerns about the future of these entities.

  • Home Improvement Stocks

Home improvement stocks are another big, obvious beneficiary of a healthy mortgage market. Whether they are buying an existing house to fix up or customize to personal taste, or building new, just about every homeowner will end up at Home Depot (NYSE:HD) or Lowes (NYSE:LOW). Remember, even new homes come without blinds, curtains, landscaping, proper drainage, backup generators and more.

  • Consumer Goods Companies

When consumers purchase new homes, one of the first things they do after moving in is start shopping. Furniture, clothing and even new cars to park in that fancy new garage are all on the shopping list. A strong mortgage market is good for the economy, which is good for the stock price of a whole host of companies that sell everything from television sets to washing machines. Pick your area of interest, do some research, and you just might find a winning stock.

  • Mortgage Servicing Companies

The bank that issues a mortgage is not necessarily the company responsible for collecting monthly payments. Firms that specialize in this type of work are known as mortgage servicing companies. An increase in mortgage applications is likely to be good news for the firms that collect mortgage payments. Some of the biggest players in this field include Home Loan Servicing Solutions (Nasdaq:HLSS), Nationstar Mortgage Holdings Inc (NYSE:NSM) and Ocwen Financial Corp (NYSE:OCN). While a less visible aspect of the mortgage business, investors may find it worth their time to look these companies over.

  • Insurance Companies

Insurance companies that provide mortgage insurance to homebuyers are yet another group of somewhat less visible companies likely to benefit from a rising number of home sales. Genworth (NYSE:GNW), MGIC, PMI Group and Radian (NYSE:RDN) are some notable names in this market. Title insurers are also worth a mention. Fidelity National Financial (NYSE:FNF), First American Financial (NYSE:FAF) and Stewart Information Services (NYSE:STC) are included in this group.

  • Real Estate Investment Trusts

The refinance activity captured in the index is viewed as a leading indicator of mortgage prepayment, which is important for investors in mortgage-backed securities, including Real Estate Investment Trusts (REITs). Refinancing enables homeowners to reduce the interest rate on their mortgages. This means that older, higher interest mortgage are paid off and replaced by lower interest mortgages. Since REITs invest in mortgages, refinance activity reduces the future income REITs can expect to earn. REIT investors are directly affected by this activity, as they invest in REITS in order to profit from the interest charged on mortgages. Higher refinance activity results in lower payments to REIT investors. Stable markets are good for REITS; there are a variety of publicly traded REITS include American Capital Agency Corp. (Nasdaq:AGNC), Annaly Capital Management (NYSE:NLY), Hatteras Financial Corp.(NYSE:HTS) and others.

  • REIT Mutual Funds

If researching REITS is too much effort, REIT mutual funds can do the work for you. Fidelity Investments, Vanguard and many of the other big-name fund companies all have REIT funds available for investors. It’s a one-stop shopping opportunity to explore the REIT marketplace.

The Bottom Line

A positive trend in the MBA Mortgage Purchase Index reflects positive economic activity as housing is a significant contributor to the U.S. economy, with new construction alone accounting for nearly 5% of the nation’s gross domestic product. The U.S. Census Bureau credits new home construction with supporting an estimated 1.5 million jobs. Existing homes add to these totals, employing remodelers, landscapers, plumbers, electricians and other service providers. By following the trend shown in the Index, investors can gauge the health of a wide variety of industries. This can help them identify investment opportunities in businesses that are poised to benefit, as well as cautionary signs to avoid industries and companies that are likely to suffer.