In 2020, the U.S. Gross Domestic Product (GDP) contracted by 3.5%. This was a record and would have been much worse but for a very strong 4th quarter. Overall, the world economy performed worse than the U.S., likely shrinking by over 4% and presenting the steepest global recession we have seen in decades. For many sectors, the negative effect of the COVID-19 pandemic is expected to be long-lasting.
There does, however, seem to be one sector that not only did surprisingly well in 2020 but thrived, and that continues in 2021. This sector is, of course the housing market. During the COVID-19 peak in 2020, housing demand increased at an unprecedented rate following the reduction of mortgage rates, which began around March 2020. The reduction in rates made housing more affordable, and the massive change to “work from home” employment arrangements spurred demand in ways that most market watchers did not anticipate in any way. As a result, housing prices increased by over 8% last year in many U.S. markets.
In this article, we look at the housing and mortgage trends going into 2021. It’s generally expected that the trends seen in 2020 will continue through 2021, even as Americans continue to get vaccinated by the millions and the economy opens up. We forecast that mortgage rates are likely to remain relatively low by historical standards but increase by as much as 1/2 a percent by the end of the summer because of inflation concerns. The supply of housing will remain tight, as people will continue to leave the cities for the suburbs, and the popularity of virtual showings and open houses is likely to be sustained.
Continued Low Mortgage Rates
We believe that the effects of COVID-19 will continue into 2021, so you can expect mortgage rates to remain low, even though they will slightly rise in 2021. The U.S. government will want to do everything in its power to ensure that the economy returns to pre-COVID-19 levels even though the rollout of a vaccine is well underway.
We are not the only ones betting on continued low mortgage interest rates. The founder of MBS Highway (a supplier of tools and guidance for the mortgage industry) and author of Money in the Streets, Barry Habib, speculates that rates will go up by about 1/2 a percent before they fall again. He believes that inflation signals are behind the upward pressure on mortgage rates, as mentioned above, but that rates will likely fall again as supply chains (broken because of COVID concerns) are repaired, and inflation concerns dissipate.
The Mortgage Bankers Association (MBA) and National Association of Realtors (NAR) are in agreement with Mr. Habib, predicting that rates will rise slightly as well. Daryl Fairweather, Chief Economist at the real estate company Redfin, also predicts a continued slow rise in mortgage rates in 2021.
A Robust VA Loan Market
BankRate.com, the financial publisher and rate comparison service, cites the director of education at Veterans United Home Loans, Chris Birk, who says that 2020 saw an explosion in mortgages sponsored by the U.S. Department of Veterans Affairs, aka V.A. Loans. This nearly doubled V.A. loan volume from 2019, making 2020 the biggest year in V.A. lending history, with more than one million loans issued.
Birk reports that V.A. loans now account for about 10% of the mortgage market. He notes that this increase has mostly been driven by younger veterans who “don’t need to spend years saving a down payment” or building a great credit profile. This is because VA loans require no down payments in many cases and are more flexible with respect to credit requirements. We expect this momentum to be sustained for much of 2021.
Tight Supply: Rising Home Prices and Sales
If the goal of lowering interest rates was to stimulate the housing market, the Federal Reserve was successful on that score. Low mortgage rates have caused an increase in demand in a market with a short supply of houses for sale, thus increasing their prices. But, are these home prices expected to keep going up in 2021?
As of January 2021, many expected there to be a cooling down in home prices in 2021. Forbes.com quoted the president of InvesTech Research and Stack Financial Management’s James Stack, who speculated that home prices are likely to go down if rates were to increase. However, that has turned out not to be the case –Stack’s fears of home prices going down were not realized due to sky-high demand and all-time record low inventory levels.
Likewise, Redfin also initially believed that the increase in new property listings, in conjunction with rising mortgage rates, would cause home prices to grow moderately slower in 2021. Redfin predicted that the tight supply would continue into 2021, which has proved to be the case. The company said that “Although the U.S. may be able to vaccinate most of its citizens by the end of 2021, many other countries will struggle to distribute vaccines.” This means that the global economic recovery will likely be slower, “which would make U.S. mortgage-backed securities attractive to international investors, keeping mortgage rates low.” Or at least lower than they otherwise would be, given the upward pressure on rates because of inflation concerns.
Increased Use of Virtual Showings and Open Houses
With restrictions on movement due to government regulations, and the general public avoiding contact with others as much as possible, physical house viewing dropped. To meet the rising demand for people who wanted to view properties without any physical contact, realtors found themselves getting more creative by using virtual home tours.
Redfin reports a 560% increase in 3D walkthrough house viewing tours since February 2020. Tours via video calls were now one in every ten home tour requests they receive. Before the pandemic, only 1% of potential homebuyers requested a video tour.
In 2021, even with vaccines on the rise, Realtors and homebuyers remain more comfortable with virtual showings and open houses, indicating that this change may be permanent. The technology also comes with several advantages, including the fact that homeowners and tenants no longer have to allow a constant stream of strangers into their homes for in-person viewings. With the increased popularity of virtual showings, it is very likely that the technology to enable such viewings will continue to improve.
Increased Migration Out of the Cities
In an article produced for Forbes.com, Peter Lane Taylor predicts that COVID-19 will change the housing market, not just into 2021, but forever. Taylor supports his views by saying that the shifts, this time around, are not just based on temporary factors like crashes in the markets, political turmoil, or financial speculation.
The changes brought about by COVID-19 are a result of a significant shift in how people feel about many aspects of their lives, such as where they shop and work, says Taylor. With these realizations, individuals are leaving the cities and heading to the suburbs.
Robert Dietz is the Chief Economist at the National Association of Home Builders. He is quoted by BankRate.com expressing the belief that Americans’ moving from major cities to suburbs and smaller cities is unambiguous. “It’s an acceleration of trends that were already in place,” he argues.
In support of the view that Americans are leaving the cities for the suburbs, Redfin reports that more than 14.5 million Americans will be moving to more affordable suburbs with more space. This is of course, exacerbated by the fact that remote working has become a more accepted practice of the COVID crisis.
Some Will Struggle
The job and livelihood losses resulting from the pandemic are well documented. Many economists agree that it will take time for many countries’ economies to get back to where they were before the pandemic. This implies that many people will continue to be unemployed and struggle to pay their mortgages and rent.
To assist many of their customers, many lenders started working with their customers to help with forbearance. This is a system where the mortgage holder and the lender agree to some relief measures, including deferring or making lower payments for a certain period.
Even though some renters and mortgage holders got relief in 2020, these protections will come to an end at some point. The National Council of State Housing Agencies (NCSHA) reported that, by January 2021, landlords will be owed up to $34 billion in unpaid rent. If that were the case, it is clear that 2021 will still be a challenging year for many.
The Executive Director of NCSHA, Stockton Williams says that the above “analysis is more proof that a huge wave of evictions and additional financial pain will crash on the American economy soon unless Congress authorizes emergency aid to renters.” While the renter situation is very serious, the situation for mortgage borrowers in forbearance is less serious. According to Barry Habib of MBS Highway, many people opted for forbearance even though they did not need it, and many borrowers in forbearance will be able to sell their homes without letting them go into foreclosure because so many now have substantial equity and because the housing market is so strong.
The Verdict for 2021
Even though interest rates climbed to about 1/2% higher in 2021 than where they were for most of 2020, the housing market remains surprisingly robust for the reasons set out above. In addition, with vaccines now rolling out by the millions and COVID on the wane, the economy appears to be bouncing back with much more fervor than many people anticipated. As a result, we don’t see the housing market losing much of its momentum this year – even if rates continue to rise another1/2 a percent, as Mr. Habib predicts.
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