By Varshika Prasanna
While the US has seen a record number of home sales during the pandemic, the mortgage market has been reacting very severely to these changes.
According to Mortgage News Daily, the average of the 30-year fixed mortgage in 2020 was around 3.75%. It fell at the onset of the COVID-19 pandemic in March 2020, but soon increased after the announcement of the first economic stimulus check in April last year. However, it continued to decrease throughout the rest of the year, setting a number of record lows. For example, it was 3.13% in the first week of April, 3.18% in the last week of March and 3.33% in April last year.
The economy is finally opening up, especially with President Biden approving the third stimulus check in March, and mortgage rates are also moving up in response. The recent decrease in unemployment rate to 6% from the 14% it was during the peak of the pandemic should also propel rates to stay on an upward trajectory. The housing market is currently experiencing dual forces: the push of increased employment and the pull of rising mortgages. Lawrence Yun, chief economist of the National Association of Realtors, claims that in 2018, the economy witnessed strong job creation but poor home sales due to an increase in mortgage rates from 4% to 4.6% by the end of the year.
Last year’s low mortgage rates fueled a rapid purchase of homes, and the effect of this increasing demand can be seen in changing mortgage rates. For the past six weeks, the 30 year fixed mortgage rate was at its highest levels compared to the last nine months, with Freddie Mac data suggesting that the 30-year fixed-rate average jumped to 3.17%. This rate was 3.09% a week ago, 3.5% a year ago, and hasn’t been this high since June last year.
The pandemic caused record low mortgages rates and encouraged city dwellers to escape their cramped living. Buyers are purchasing second homes and investment properties as a result of this accounted for 14% of all purchase-mortgage applications in February. However, Freddie and Fannie have restrictions that no more than 7% of the mortgages they own can be tied to second homes or investment properties. This cap is set based on the overall dollar volume of loans purchased by Fannie and Freddie, and is applicable to the lenders that sell them the loans. While Freddie is in compliance with these rules, Fannie is slightly above them, and has asked all its lenders to get into compliance by July 1st. Second home buyers are in an unfortunate situation, as this shift by Freddie and Fannie is also causing mortgage rates to increase. The growth of the housing market right now is largely dependent upon second-home and investment purchases in some states, especially Vermont, Maine and Arizona. Thus, the new rules could take a greater toll on home prices in these areas.
Dick Kittredge, a mortgage banker in Vermont, told the Wall Street Journal that around 60-70% of his business involves helping residents of New York and Boston find vacation homes. While his business has been booming, he worries that the regulations will disrupt business as lenders everywhere are now concerned with the increasing volatility, especially those who already had loans they planned to sell to Fannie and Freddie this spring.
Some motivated buyers are choosing to finance their purchases through an all cash deal, while others plan to take advantage of equity in their primary residence to purchase another property. Wealthy buyers who take out mortgages that aren’t backed by Fannie and Freddie will most likely not be deterred by having to pay more interest every month. Freddie Mac’s rates are aggregated from across 80 lenders in the country with high quality borrowers who have strong credit scores and give large down payments. Since, every borrower does not have access to them, it makes sense that wealthier borrowers are not worried about the increased interest expense.
Danielle Hale, Realtor.com’s chief economist, claims that one can expect an upward trend in mortgage rates as the growing economy draws investors towards stocks and out of bonds. With stimulus payments and vaccinations supporting robust economic growth, concerns that this growth will fuel inflation has driven mortgage rates higher, since inflation decreases the worth of long-term assets like mortgage backed securities and Treasuries. When inflation fears become more tenacious, investors sell those assets, causing yields and mortgage rates to rise.
While the mortgage rates dropped to 3.13% in the second week of April, it’s merely a temporary reprieve from the larger trend observed this year. However this ‘plateau’ won’t last if there are other indicators that suggest an increase in inflation. Over the long term, the rising mortgage rates reflect a strong economy that is bouncing back from the pandemic, and eventually signalling rising inflation. Though mortgage rates are starting to become more stable, potential homeowners will still have to pay more for the same home loan than they would have 3 months ago. However, the rising rates aren’t stopping people from choosing to mortgage, as the current high rates are still lower compared to the previous decade.
Overall, the mortgage market is reacting very strongly to the increasing demand for houses. This is possibly due to the connection between mortgage loans and the last global financial crisis, coupled with concerns about the decrease in the real value of real estate given rising inflation due to stronger economic conditions. □
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- Eisen, B., & Ackerman, A. (2021, April 01). Vacation-Home Buyers Propped Up the Mortgage Market. Now They Face a Test. Retrieved from https://www.wsj.com/articles/vacation-home-buyers-propped-up-the-mortgage-market-now-they-face-a-test-11617269402
- Orton, K. (2021, April 08). Fixed mortgage rates upward march halted as they fall for the first time in 7 weeks. Retrieved from https://www.washingtonpost.com/business/2021/04/08/fixed-mortgage-rates-upward-march-halted-they-fall-first-time-7-weeks/
- Passy, J. (2021, April 08). Mortgage rates fall for the first time since February – but don’t necessarily expect a long reprieve. Retrieved from https://www.marketwatch.com/story/mortgage-rates-fall-for-the-first-time-since-february-but-dont-necessarily-expect-a-long-reprieve-11617890901