Mortgage Rates Hit Record Lows. Could They Fall Even Further?

InterestRates

One of the few bright spots for home buyers and owners in 2020—a year marred by a pandemic, economic recession, social unrest, wildfires, hurricanes, and a highly polarized presidential election—has been rock-bottom mortgage interest rates.

Mortgage rates have been tumbling since COVID-19 disrupted the nation’s economy, achieving what many experts had believed was impossible: They dipped just below 3% in July. Rates have since fallen even further, reaching an all-time low of 2.86% for the average 30-year fixed-rate loan in the week ending Sept. 10, according to Freddie Mac. They ticked up to 2.87% in the week ending Sept. 17.

Those lower rates have allowed buyers to stretch their budgets at a time when home prices are on the rise. Homeowners who refinance their existing loans can potentially shave $100—or more—off their monthly mortgage payments, saving tens of thousands of dollars over the life of their loans. (The exact amount depends on the size of the loan and the previous rate.)

Now, many folks are wondering if rates can fall even further—and just how low they might go. The U.S. Federal Reserve pledged on Wednesday not to raise its own short-term interest rates, currently at around 0%, to give the economy a much-needed boost. So could that lead to mortgage rates dropping further?”That’s the big question. Are rates going to keep falling? Are they going to rise?” says Len Kiefer, Freddie Mac’s deputy chief economist. “The honest answer is, we don’t know. Economists have not had much luck in forecasting” where rates will go.

The problem is, 2020 hasn’t been a typical year. There’s never been a pandemic in our lifetimes, and this recession is driven by a virus, not a housing bubble or oil crisis or other economic trouble. And while mortgage rates are influenced by the direction of the Fed’s short-term interest rates, it’s not uncommon for them to, well, do their own thing.”Technically speaking, mortgage rates could go lower. Theoretically, they could easily drop to around 2%,” says Senior Economist George Ratiu of realtor.com®. “However, for lenders [who set their own rates], the likelihood of rates going much lower is pretty slim. They don’t want to take the risk of a lower rate over the length of a loan.”

That’s what happened in March. Rates fell to around 3.3% in response to the coronavirus-induced upheaval in the financial markets, and homeowners rushed to refinance their existing mortgages. Lenders were so overwhelmed by the surge in business that they raised their rates to temporarily keep new refinances at bay as they scrambled to catch up.Refinances have since slowed to more manageable levels, and rates have fallen.

Why mortgage rates could fall even further—or not

For buyers, even lower rates could at least somewhat offset home prices, which have jumped just over 11% year over year, according to the latest realtor.com data. Those low rates can bring previously unattainable homes within reach. So it’s understandable that buyers are watching eagerly to see which direction rates will go.“If we were to see the economy struggle a bit, that might cause rates to decline,” says Kiefer. “If the economy is stronger than we expected, they might rise a little faster.”So what’s going on? Bear with us here for a brief mortgage finance breakdown.

Rates are determined more by investors than by the Federal Reserve’s own rates. Lenders don’t want to hold onto the mortgage loans they make, as they want to free up capital to make new loans and profit off those. So they bundle up their mortgages and sell these mortgage bonds, aka mortgage-backed securities, on the secondary market to investors.When the financial markets are all over the place (like this year), investors will often pull money out of stocks and pump it into the relative safety of Treasury and mortgage bonds. These are considered to be safer, long-term investments. Now, mortgage rates are tied to the 10-year U.S. Treasury bond market. So when the bond market is strong, mortgage rates fall.And right now the federal government has committed to buying up mortgage securities, to stabilize the market in the face of this economic downturn. That’s led to a surge in demand, which also pushes rates down. “Investors are still clamoring for mortgage bonds because a weak economy and volatile stock markets make a lot of conservative investors nervous,” says Ratiu. “Bond investors are attracted to mortgage bonds, because the real estate market recovery is stronger than the rest of the economy.”

Kiefer points out rates have typically fallen by about 2 percentage points a decade. In the 2010s, they were around 4%. So they could, potentially, fall further into the low 2% range if they keep up that pattern.He believes rates might stay where they are, or fall just a little more, into the 2.75% range.“If you’re in the market for a refinance or a home purchase, rates can move very quickly,” says Kiefer. “The rate [you] see this week could be very different next week. There’s a lot of room for rates to move.”

That means buyers and those seeking to refinance need to have a good grasp of what the numbers mean for them.“You can wait for a basis point lower, but ultimately you have to weigh the trade-offs given the fast-rising prices,” says Ratiu. “Home prices are rising fast, so waiting for a lower rate is likely to have little benefit.”

Provided courtesy of Realtor.com by Clare Trapasso,  senior news editor of realtor.com and an adjunct journalism professor at the College of Mount Saint VIncent. She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She is also a licensed real estate agent. Contact her at clare.trapasso@realtor.com.

 

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2020 Home Value Predictions

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As recession fears mount, I wanted to share some information on why home prices are predicted to stay level (from MarketWatch). The last, “great recession” of 2008 was fueled by a series of events happening in sequence that in hindsight were avoidable:

  • An explosion in both home-building activity and mortgage credit to home buyers with no income documentation or down payment + 0% introductory loans that allowed them to be over-leveraged.
  •  Add to that rampant unemployment.
  • Very little home equity as it had been leveraged through home equity loans (often to purchase rental properties).
  • An unexpected downturn in the housing market as it was flooded with “upside down” rental properties.
  • A foreclosure crisis that could not be absorbed by the market, banking institutions, or loan service companies.

 

With this combination of events you begin to understand how this period of economic downward spiral was fueled by the perfect storm. Unlike the 2008 recession, the current housing market today is not driven by homeowners who are highly leveraged. In fact, the household debt-to-income ratio is at a four-decade low.

 

Since 1980, the U.S. Housing market has weathered all other recessions. Deputy Chief Economist Odeta Kushi with First America in a recent report is quoted as saying, “In 2020, we argue the housing market is more likely poised to help stave off recession than fall victim to it.” Kushi goes onto share, “With the exception of the Great Recession, house price appreciation hardly skipped a beat and year-over-year existing-home sales growth barely declined in all the other previous recessions in the last 40 years.

 

The recent growth in home prices is fueled by: Supply & Demand. While this is making the possibility of homeownership unaffordable for millions of Americans, it also means that countless more homeowners have seen their home equity grow substantially in recent years. This equity decreases the likelihood that they will be underwater on their loan if home prices were to dip and thus serves as a shelter during a downturn.

In terms of the corona virus’ effect on the housing market, Mark Fleming, Chief Economist of First America, states, “This time, housing is a casualty of a public health crisis turned economic, not the cause of an economic crisis.” In his recent post, he charts the differences between the pre-Great Recession housing market and the one at the cusp of the coronavirus outbreak.

 

ThisTimeItsDifferent

 

“Today, house-buying power is nearly twice as high as the median sale price of home, implying that housing is not overvalued, and is in fact in a much better position entering this potential recession than it was ahead of the last,” continues Fleming.

But homeowners should stay alert for potential red flags! Be cautious of scenarios where:

  1. A significant number of homeowners begin to take cash-out or home equity loans that will result in a whittling away of their equity and this “safety net” against economic downturn.
  2. A ripple effect of foreclosures in our region which would cause your home to drop in value.

THERE’S REASON TO BE ENCOURAGED:

“Many expect the housing market to follow a similar trajectory in response to the corona virus outbreak. But, there are distinct differences that indicate the housing market may follow a much different path. While housing led the recession in 2008-2009, this time it may be poised to bring us out of it, ”
Mark Fleming, Chief Economist of First America

In closing, we can all take heart that our leaders, scientists, and healthcare providers are doing everything possible to minimize the economic effects of the corona virus. And, we can all do our part as well. #stayhome #staysafe

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January 2020 Seller’s Market

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