U.S. mortgage demand drops, supply caps improvement

NEW YORK (Reuters) - Demand for U.S. home loans fell by more than 8 percent as fixed mortgage rates rose last week in a banking period shortened by the Labor Day holiday, the Mortgage Bankers Association said on Wednesday.

Total applications were nonetheless at one of the highest levels seen since early June, with borrowers still eager to take advantage of the federal first-time home buyer tax credit before the program closes at the end of November.

Borrowing costs stayed relatively low, which continues to foster demand for potential buyers. But there is growing concern about whether housing can sustain its recent momentum once some key government rescue programs end.

As a result, the real estate industry is pressing Congress to extend the tax credit to all buyers and increase the size to $15,000 from $8,000 in a program now set to end on November 30.

Another concern is the end-2009 deadline for Federal Reserve mortgage-related debt purchases of up to $1.45 trillion -- aimed at keeping loan rates down.

"If the first-time home buyer tax credit expires at the end of November and if the Federal Reserve were to significantly scale back their mortgage (bond) purchases early in 2010, the housing market could hit a wall very quickly," said senior Bankrate financial analyst Greg McBride in North Palm Beach, Florida.

"I don't think that the Fed is going to do anything rash," he said. "I think they will slowly back away from the table so as to keep a lid on mortgage rates."

RATES EDGE UP

Average 30-year loan rates rose 0.06 percentage point to 5.08 percent last week. The rate was up from the record low of 4.61 percent set in March, but down from 5.82 percent a year ago, the industry group said.

The seasonally adjusted mortgage applications index fell 8.6 percent in the week ended September 11 to 592.8, driven by a 10.3 percent drop in its purchase applications index and a 7.4 percent slide in refinancing demand.

These figures were adjusted to account for Labor Day.

Housing market upside is limited by a supply of unsold homes inflated by foreclosures, industry executives and economists say,

"We still have a lot of inventory in the marketplace and that is continuing to put pressure on pricing, but pricing has come down to a level that has really opened the marketplace to a lot more buyers," said Tom Kunz, chief executive of Century 21 Real Estate in Parsippany, New Jersey.

"We need to stimulate the move-up marketplace because there's too much inventory out there," for first-time buyers to absorb, he said.

A 26-year high in unemployment and wage cuts have added to the hardships in housing, forcing many new foreclosures that further swell housing inventories.

Job loss and underemployment spread the pain in housing from the subprime sector, where borrowers often only could afford initial payments with exotic and risky adjustable-rate loans, to "prime" borrowers that favor fixed-rate mortgages.

For the first eight months of the year, 69 percent of homeowners who turned to national nonprofit Consumer Credit Counseling Service of Greater Atlanta for foreclosure prevention help had fixed-rate loans. That was up from 53 percent in the same period last year.

"The housing recovery will be constrained by lingering excess supply," Joshua Feinman, chief economist at Deutsche Bank's DB Advisors, said in a report. "The scars from this crisis will likely keep households and financial intermediaries cautious for some time."