Mortgage applications drop

A sign points to a home for sale in a new subdivision in Vancouver, Washington, April 25, 2006. Applications to buy and refinance homes dropped last week, an industry trade group said on Wednesday, the latest sign that U.S. housing remains mired in a downturn.

NEW YORK (Reuters) - Applications to buy and refinance homes dropped last week, an industry trade group said on Wednesday, the latest sign that U.S. housing remains mired in a downturn.

The Mortgage Bankers Association's mortgage application index slid 3.4 percent to a seasonally adjusted 643.7 in the week ended June 15.

The drop in applications piled on to reports from the country's builders and the government this week suggesting any sustained housing rebound could be next year's business.

"We're not through with this correction," said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta.

Prices have to drop as much as 8 percent, depending on the house type and location, to pare an unusually large supply of unsold homes lingering on the market, he said.

"If new supply is priced initially significantly lower than existing homes of the same rough quality, then maybe they don't have to come down," said Miller. "But price correction is an absolute necessity, affordability got way out of hand."

Housing starts fell more than 2 percent in May as builders grappled with a stockpile of unsold homes, the Commerce Department said on Tuesday.

Sentiment among home builders sank to its weakest level this month in more than 16 years, based on an index reported on Monday by the National Association of Home Builders. The group expects building and sales will keep eroding until late this year before starting to recover in 2008.

"The production side has clearly slowed down," Miller said of homebuilding. However, he added: "We're not doing a good job of clearing existing inventory, and that's not good news for the production side."

On Wednesday, the MBA's seasonally adjusted purchase index fell 3.0 percent to 450.9 while its refinancing applications index shed 4.2 percent to 1,776.8 on a seasonally adjusted basis.

Thirty-year mortgage rates dipped 0.01 percentage point last week to 6.60 percent, the MBA said. Average 30-year mortgage rates last hovered in this area in July 2006.

Last week, the MBA reported that U.S. homeowners started the foreclosure process at a record pace in the first three months of the year.

"The housing recession is showing few signs of letting up as exhibited by rising mortgage foreclosures, falling prices, and reduced construction activity," Deutsche Bank economists wrote on Wednesday. "We remain concerned about spillover effects from the weakness in the housing data -- negative wealth effects, mortgage rate resets, housing related spending."

SUBPRIME SEEPAGE

Among the bigger problems were subprime adjustable-rate mortgages in some of the markets that had been the hottest during the five-year record home price and sales spree earlier this decade.

Riskier borrowers are increasingly being pushed into the foreclosure process as their adjustable loans reset at much higher loan rates, boosting payments beyond reach.

On Tuesday, Dallas Federal Reserve economist John Duca cautioned that the housing slump could be prolonged by lenders cutting back loans to subprime borrowers, or those with blemished credit histories.

Many lenders have become much more restrictive in response to the mounting foreclosures. As a result, more applications are being rejected, and builders worry that rising mortgage rates will weaken demand for homes already pressured by tighter lending practices.

For MBA data table, please see <ID:nN10636246>.