The housing market is strong at the moment, with a frenzy of refinancing and new mortgage applications following positive economic trends. But with the virus not fully under control, there is still a lot of uncertainty that could trigger another economic crisis.
Observation #1: Mortgage rates are low, and refi activity is off the charts
If you have good credit, 20% equity, and can get your rate down by a half point or more, you should consider refinancing.
- Mortgage rates continue to be historically low, providing a huge incentive today to buy or refinance a home. In fact, mortgage rates recently hit an all-time low for the eighth time this year.
- The 30-year fixed-rate has been averaging around 2.9%, the lowest in history, dating back to 1971.
- This stimulates purchase and refi activity. Nearly $1.1T in first-lien mortgages originated in Q2 2020, the largest quarterly origination volume on record.
- Close to 20 million people are good candidates for refinances. These candidates have good credit (700 and up), at least 20% equity in their homes, and can reduce their mortgage interest rate by a half to full point or more.
Observation#2: The Fed wants to keep rates low for at least the next few years
This is great news for everyone looking to upgrade, refinance, or move to a new market to follow job opportunity.
- The Federal Reserve announced it is committed to supporting the U.S economy and its economic projections assume rates will remain near zero until at least 2023.
- At some point, refinance activity will level off as the majority of people who can take advantage will do so.
- For now, the mortgage market in Q3 is positioned to outperform the Q2 numbers, at least according to the rate lock data.
- Rate lock data projects mortgage activity because it takes 45 days to lock in a rate and complete a transaction. Purchase locks scheduled to close in Q3 are 23% above seasonal expectation.
Observation #3: Economic tailwinds include stock market and savings increases
Now is a great time for young and first-time homebuyers, as equity and savings increases are pushing up homeownership rates.
- Today, you can get a lower rate than any first or move-up home buyer in the past two generations.
- First American estimates that house-buying power (how much home one can afford to buy given household income and the prevailing mortgage rate), increased 15% since July 2019.
- As a result, amid the pandemic, the homeownership rates in the second-quarter soared to a 12 year high, highest levels since the financial crisis.
- Equity continues to rise for older generations, allowing them options such as to refinance to lower their payments or to move up or to help their kids with a downpayment toward their own home.
- Personal savings have reached all-time highs in light of people spending less while sheltering at home. This money can go toward a downpayment.
Observation #4: The big city exodus is overstated
Some have left big cities for suburbs due to wanting more living space or affordability concerns, but the trend is only temporary.
- Post-pandemic we’ve seen a disproportionate rise in property values of secondary or rural markets compared to big cities.
- We’ve also seen price drops for the first time in a while in San Francisco and NYC.
- Everyone whose job allows them to work from home has been rethinking space amid the pandemic. Based on real estate listing sites, we see that one bedroom apartments are being traded for two bedrooms to add office space, and condos are being exchanged for single family homes, etc.
- This is mostly a knee jerk reaction as people do not want to work remotely forever. The culture and accessibility of cities will remain strong attractions.
Observation #5: Optimism must be balanced with signs of uncertainty
There are signs that we are better able to treat and deal with the virus, but the virus itself is not under control.
- While some of the economy is resuming normal activity, some businesses closed permanently due to shutdowns.
- Foreclosure and eviction moratoriums are still in place to avoid magnifying the health hazard as well as protecting people from financial ruin. Eventually they will run out.
- Affordability could become a problem if supply remains tight, which will push prices upward.
- Economic fundamentals are all trending in the right direction. But they’re still worse than pre-pandemic levels, i.e. unemployment, GDP growth, etc.
- The first stimulus is wearing off and the second round is not certain with political gridlock consuming Washington DC.
- The upcoming election and aftermath are big question marks for everyone.