For the second week in a row, the number of US mortgage applications rose, but the vast majority of the action came in refinancing, not new purchases. This spells continuing pressure on new home builders and not much prospect for people back to work building new homes.

The Mortgage Bankers Association reported this morning that applications for mortgages rose nearly 22% in the past week.  Refinancings jumped 30%, while purchase applications fell by nearly -1%. The news comes the day after one analyst firm lifted ratings on three builders from ‘Sector Perform’ to ‘Outperform’. The three were NVR Inc.(NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), and M/I Homes, Inc. (NYSE: MHO). Three other builders received similar upgrades on Monday: Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The lone winner, not the ‘loan winner,’ may be Stewart Information Services Corp. (NYSE: STC).  All that matters for them is volume rather than if it is a refinance or a purchase.

Beazer reported its third-fiscal quarter earnings yesterday and badly missed already low expectations. The company reported an EPS loss of -$0.80, compared with an expectation of an EPS loss of -$0.42. Revenue of $172.8 million missed expectations of $232 million. Shares posted a new 52-week low of $1.69, and closed at $1.83. Ryland posted a new yearly low yesterday as did all the others we’ve noted.

A big part of the problem the builders face is the number of existing homes available for sale and the number of bank-owned homes, called REOs for “real-estate owned”, also on the market. In June a record number of REOs were sold and the inventory of REOs fell significantly. That should be good news for builders.

Alas, the good news must be tempered with the knowledge that 90-day delinquent loans and loans in foreclosure have been getting processed more slowly. Foreclosure proceedings have been delayed by process issues, changes in state foreclosure laws, and court rulings that have to be applied to existing foreclosures.

Freddie Mac expects the delays in foreclosures to continue through the rest of 2011. As a result, REO inventory is very likely to continue to decline, giving a false picture of the true level of delinquent and foreclosed properties. As that inventory falls, the instinctive response is that new building will increase.

While that may happen, far likelier is that the bottleneck on foreclosures will finally open and the REO inventory will jump again. New home building will come under pressure again as builders are forced to compete with foreclosed properties now up for sale at distressed prices.

With the S&P down by nearly -3% this morning, Beazer and PulteGroup are down more than twice that amount. Beazer shares have posted another new low today, at $1.68. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down about -3.5%, at $13.64, just inside the 52-week range of $13.15-$19.21.

Paul Ausick

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