Rates experienced a slight reversal coming back from the long weekend, with the 30-year fixed rate mortgage increasing by two basis points to settle at 2.88% while the 15-year grew by a single basis point to settle at 2.41%.
A Recap of What’s Happened:
For those of you keeping track at home, it’s been six months since COVID-19 came into our lives and turned everything upside down. For those of us in international waters, it may even be longer. As we look back on how this pandemic, in conjunction with other circumstances, has affected the housing market, it’s important to distinguish between what we speculated at the time and what we now know to be fact. So, here is a brief overview of everything we’ve experienced since COVID, from the biggest buyers to the hottest markets to the lowest rates.
The #1 Buyers of Homes and Avocado Toast
As of last year, millennials represented more than 50% of new home loans. And they aren’t slowing down any time soon. According to Ellie Mae, this group represented 61% of purchase loans for the month of July.
This is true for a couple of reasons. The biggest group of millennials were born in 1990, meaning many will be turning 30 and entering typical home buying age by the end of this year. In addition, just last year, millennials surpassed Baby Boomers as the largest living adult group. Based on this and other observations, the First American Financial Corp has estimated that millennials could be responsible for at least 15 million home sales over the next 10 years.
Another contributing factor is the onset of low rates. By taking advantage of today’s low rates and affordable mortgage programs, many millennials have been able to get their foot in both the proverbial and literal door. This is apparent when we look at mortgage data from July. Of those who purchased a home with a FHA loan (which has less stringent credit requirements and lower minimum down payment), 97% were younger millennials. However, it’s unclear how long this demand will last as younger workers continue to be at higher risk of unemployment than older workers.
From Chain Link to White Picket Fences
People are looking to get away, not just for a holiday, but for good. Sometimes this means going to popular vacation spots, and sometimes just to the nearest suburb. While the data has mostly been anecdotal for now, various companies have been able to support this claim that people are moving out of cities as more companies are allowing for remote work and people want more space for home offices and outdoor time.
Black Knight has found that while New York’s condo prices fell to five-year lows, nearby suburbs in New Jersey and Connecticut have started to hit 10-year records for single family home prices. The same was true of Marin County (north of San Francisco) and Santa Clara (a suburb in San Jose). Economist Tom Lawler has also been seeing a spike in residential home sales in counties with beach and mountain resorts. For instance, Monroe County, PA, known for its scenic Pocono Mountains, experienced a 47.7% spike in residential sales as well as a 56.7% drop in inventory. However, this doesn’t mean the end of urban life as we know it. While many contemplate this conversion to suburbia (leading to a spike in Internet searches for suburbs), far fewer are likely to actually make this move.
Rates Are Out for the Count
The sheer enormity and anomalousness of this pandemic pushed rates to record-breaking lows, rendering many rate projections from 2019 obsolete. Where before many experts had on average estimated rates to hit 3.7%, most now believe rates will stay at 3.0% through 2021. Some, including Wells Fargo and Fannie Mae, believe rates will dip into the high 2s some time before 2022.
It’s important to note that when the virus first hit headlines in January and February, rates continued to stay stable, even as the 10-Year Treasury yield (a normally reliable rate indicator) sank. What eventually pushed rates to new lows was a combination of the Fed’s swift response and its all-in approach as it funneled billions of dollars into mortgage-backed securities.
In the future, once the Fed relinquishes its influence in the mortgage market, rates will go back to being under investors’ purview. And should inflation rates rise above 2%, which the Federal Reserve has now conceded to let happen, mortgage rates may go up with them so that investors may receive a “real” return. However, given our low inflation levels, that is more a concern for tomorrow than today.