As 2020 rumbles to a close, you may be wondering about the housing market — and pondering what comes next. Historically low mortgage rates have helped fuel demand and refinancing activity. So have other factors. Buyers looking for more space to accommodate work-from-home arrangements or homeschooling needs are among the trends driving strong sales.
According to Zillow Research, the typical American home sold in September, 2020, went under agreement after 16 days — down from 28 days a year ago, or about 44% faster. September’s pace was also lower than in August, when the typical home sold went under agreement after 17 days.
As the year winds down, mortgage rates are still low, making home loans more affordable for borrowers. At the same time, though, home prices have risen under pressure from a lower supply of homes, pricing some buyers — especially those who don’t have a lot of money to put down — out of the market.
Here’s a rundown of what’s transpired with lending and the housing market in 2020, and what some experts believe may happen next.
Mortgage rates remain at or near historic lows.
The average mortgage rate for a 30-year fixed loan fell to 2.72% during the week of November 19, 2020, according to Freddie Mac. The figure represented the lowest in the mortgage giant’s survey history dating back to 1971, and was the thirteenth record low for 2020.
Freddie Mac’s forecast is for rates to hover near 3.00% through the end of 2021. Many homeowners have taken advantage of the opportunity to save money on a monthly mortgage payment by refinancing to a lower rate. VA and FHA loans, as well as most recent conventional loans, don’t carry a penalty for prepayment.
The Federal Reserve is committed to supporting the economy during this challenging time. What does that mean for mortgage rates?
In addition to a weak economy, part of the reason Freddie Mac believes rates will stay near 3.00% is because of a new Federal Reserve policy.
In September, the Federal Reserve said it would keep its target for short-term interest rates (a rate banks use to lend to each other) at a range of 0%-0.25%. That didn’t change. What did is that the Federal Reserve said this would happen even if inflation showed signs of exceeding its 2.0% goal.
The Federal Reserve in the past would typically begin raising interest rates if signs of inflation became evident. The September policy shift, aiming to achieve moderate inflation above its 2.0% target, could help keep mortgage rates low for some time, according to Freddie Mac.
“Given weakness in the broader economy, the Federal Reserve’s signal that its policy rate will remain low until inflation picks up, and no signs of inflation, we forecast mortgage rates to remain flat over the next year,” Freddie Mac said in its mid-October Quarterly Forecast.
Inventory is low, leading to higher prices.
Low inventory of available homes for sale has put upward pressure on prices. While a large number of homeowners have seen a nice jump in their equity in 2020, buyers have face stiff competition for properties on the market, and affordability is an issue for many.
Recent figures from the Federal Housing Finance Agency (FHFA) show that home prices were 6.5% higher in July of 2020 compared to a year prior. And prices rose by more than 2.0% between May and July, the largest two-month price increase since the FHFA began compiling data in 1991 for its House Price Index.
Meanwhile, the National Association of Realtors (NAR) reported in September that total housing inventory at the end of August fell by 18.6% from a year ago.
NAR says the imbalance between robust housing demand and available supply will inevitably harm affordability and hinder ownership opportunities.
A rising tide hasn’t lifted all boats.
The economic fallout from the coronavirus pandemic also appears to be a factor in fewer home sales in certain market segments while benefiting others.
According to Redfin, luxury home sales increased by 41.5% in the third quarter compared to a year ago. That was the largest jump since 2013, when Redfin began tracking this data. On the flip side, sales of medium-priced homes climbed just 3%, and sales of affordable homes declined 4.2%.
Redfin says the figures underscore the pandemic’s “disparate impact on Americans with lower levels of wealth.”
Lenders have tightened their borrowing standards.
In 2020, it became tougher to get a mortgage — particularly through programs for borrowers with low credit scores or low down payments. The Mortgage Credit Availability Index, compiled by the Mortgage Bankers Association (MBA), fell 1.9% in September to 118.6, its lowest level since February 2014.
The MBA says the data indicates that lenders are being cautious. It cited a spike in mortgage delinquency rates during the second quarter of 2020, and ongoing economic uncertainty. Lenders might be more inclined to apply less strict underwriting when the economy gets back on better ground.
Changes to loan limits have made VA loans even more attractive.
Veterans and servicemembers with eligibility for a VA loan are among those with the best loan options in the current market. Not only does the VA loan program offer an option for many Veterans to own a home with zero down payment, but new legislation effective in 2020 removed the VA loan limit restrictions for many borrowers. On top of that, VA loan rates are competitive, often lower than those for conventional loans.
Learn more about the benefits of VA loans and other government loan programs.
Veterans First Mortgage has three decades of specialized experience in helping Veterans with homebuying and refinancing.
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