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Category: Mortgage (Page 1 of 34)

Lending Coach Forecast 2021 – Real Estate and Mortgage Rates

In taking a look at the 2021 real estate and mortgage rate forecast, I’ll briefly analyze what’s driving the real-estate market and what should impact interest rates over both the long and short term.

Similarly to 2020, the biggest issue will be finding enough homes for buyers, as housing inventory is near all-time lows throughout much of the country. 

At the same time, because of today’s low mortgage rates, housing affordability is at a fantastic level, even with increase in home prices, which is great news for buyers.

Real Estate

First, let’s take a look at 3 different factors regarding real estate that impact pricing – supply and demand, appreciation, and home affordability. 

Supply and Demand

You might remember the idea of supply and demand from your economic or social studies school days. Real estate prices also depend on the law of supply and demand.  When the demand for property is high but property is scarce, prices rise and it becomes what is known as a “seller’s market”. Alternatively, when the number of available properties increases and saturates the market, prices typically drop.

Right now, we are in a time of low supply and high demand – making prices rise.

There are a few reasons for this phenomenon, and we will see them into 2021 and beyond.

Demographics

First of all, the number of first-time home buyers is actually increasing, mainly due to the number of babies born in the late 1980s and early 1990s.  The average age of a first-time buyer is 33…and you can see by the chart below, we are just getting started:

Millennials are expected to drive the market in 2021, while Gen-Z buyers, the oldest members of which will turn 24 in 2021, will also step onto the playing field as first-time buyers.

Over the next 4 to 5 years, there will be more buyers in the marketplace, increasing demand, keeping prices moving slightly upward.

New Construction

Housing development continues to lag across the nation. Thanks to a 3 to 6 month shutdown that started in March of last year due to Covid-19, new construction slowed considerably in 2020:

As you can see by the chart, there just were not as many homes built last year than in years prior.  This is creating shortage of inventory for would-be buyers…which means prices move higher, as well.

Inventory

If you’ve been checking up on the latest real estate news, you’ve probably seen quite a few reports saying that housing inventory is low at the moment. Well, those reports are absolutely correct:

As you can see in the chart above, inventory has acutely been falling since 2011 and has reached all-time lows in 2020.

Frank Nothaft, a senior vice president and chief economist at CoreLogic, said low home inventory has led to rapidly increasing prices across the nation as dedicated buyers compete for a limited number of homes.

However, he said the number of homes for sale will increase with widespread vaccination for the coronavirus, which kept some of the most vulnerable homeowners from selling this year.

Affordability

Believe it or not, current research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.

For example, weekly earnings are up more than 5.9% versus a year ago.  Additionally, only a portion of your income goes towards paying your mortgage.  A 5.9% rise in income can offset a much greater percentage rise in housing expense.

For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last four years because real wages are up and interest rates are down, even considering the Covid-19 pandemic.

This tells us that homes are actually more affordable, even though they have appreciated significantly over the last few years.

You can find out some specifics about housing affordability here….

Appreciation

Real estate appreciated at 8.2% year-over-year from 2019 to 2020 according to Core Logic.

This is fantastic for homeowners, and although 2021 might not have the same increase, most experts see appreciation to be in the 4% to 6% range in 2021. 

“The housing market performed remarkably well in 2020 despite the volatile economic state. While we can expect to see lingering effects of COVID-19 resurgences and subsequent shutdowns in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong. Frank Martell, President and CEO of CoreLogic

Interest Rates

Mortgage rates have risen a little during the first 10 days of 2021, due to the market’s concern that there will be increased spending, debt, and inflation with the incoming administration.  The 10-Year Treasury yield is now at its highest level in a year, which is the best tracker of mortgage rates – find out more about that here…

Federal Funds Rate

How can mortgage rates actually rise when the Fed Funds Rate remains at zero?  Let’s remember that the Fed Funds Rate and Mortgage Rates are two very different things.

The chart below shows how mortgage rates move in a similar direction to the Federal Funds rate, but still move up-and-down, even when The Fed has rates at 0%.

As you can see, mortgage rates can move up over 1% even with the Federal Funds rate at 0%!

You can find out more about the relationship between the Fed and mortgage rates here…

Mortgage Rates

It’s important to remember that although we’ve seen a little move higher in mortgage rates in the first week of 2021, they are still near all-time low levels.

Per most industry analysts, rates should remain low for 2021, although there may be some ups-and-downs due to inflation related pressure.

Mortgage rates are affected by inflation because inflation erodes the buying power of the fixed return that a mortgage holder receives.  Interestingly, the best way to combat inflation is by raising the Fed Funds Rate.  If inflation begins to rise, and there are already some signs of this, Mortgage Rates will start to climb in response.  All this can occur while the Fed Funds Rate is at zero. 

With that said, the industry experts I follow seem to think that we should see rates in the 3% to 4% range for the 30-year mortgage over the course of 2021.

Debt and Interest Rates

One reason to believe rates will stay low, even with Covid-19 concerns and inflation, has to do with governmental debt loads relative to mortgage rates.  Historically, the higher the debt, the lower rates move. 

The chart above shows the debt level in red (moving upward) and interest rate level in blue (moving downward).  With all of the debt that the US has taken on in the last year, we can probably expect to see rates stay relatively low.

In Conclusion

2021 looks to be a positive one for both buyers and sellers, although the market would clearly be considered a “seller’s market”, because inventory is so low.

However, because real wages are up, home affordability is up, and interest rates are forecasted to remain low, buyers are in a great position to purchase. 

To sum up the 2021 real estate and interest rate forecast:

  • Mortgage rates are likely to remain low
  • Housing inventory will continue to remain low
  • Demand for real estate will rise due to a combination of factors
  • Home prices will continue to move upward
  • Housing will still remain affordable, due to low rates

In reality, now is a fantastic time to purchase or refinance and take advantage of market appreciation and low mortgage rates. Contact me for more information, as it would by my privilege to help you.

New Conforming Loan Limits for 2021

The Federal Housing Finance Agency announced new baseline conforming loan limits for Fannie Mae and Freddie Mac in 2021: $548,250.

This is a 7.5% increase from the 2020 limit of $510,400 and marks the fifth consecutive year of increases from the FHFA.

This is important because now buyers and borrowers can purchase a higher priced home and still stay within conforming loan guidelines. That means easier qualifications at higher price points.

In 2016, the FHFA increased the Fannie and Freddie conforming loan limits for the first time in 10 years. Since then, the baseline loan limit has gone up by $131,250.

You can find out more here…

These new limits apply to conventional, conforming loans (those sold to or backed by Fannie Mae and Freddie Mac), for both refinances and purchases.  Any loan amounts above these limits would be considered “jumbo” loans and fall outside of conventional guidelines.

Do I have to wait until 2021 to take advantage of a higher conforming loan amount?

Actually, no.  The change actually applies to the date that Fannie and Freddie sign off on the new loan (either via “delivery” or “securitization”). 

Essentially, any loan originated today would most likely close in 2021 and fall under the new loan limits.

Please do contact me for more information!

Down Payment Options – 20% Down Not Necessarily Required

“How much should my down payment be for a house?”

It’s a question that I hear all the time from would-be home buyers.

And, the answer is:  “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”

Or, perhaps your situation is reversed.

“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”

Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”

“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Larger Down Payments Actually Increase Risk

Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.

In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.

The riskiest decision we can make when purchasing a new home?

Making too big of a down payment.”

The Higher The Down Payment, The Lower Your Rate of Return

The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

  • With 20% down on the home — $80,000 –your rate of return is 25%
  • With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!

The Fed’s Latest Announcement Has Little To Do With Mortgage Interest Rates

The Federal Reserve board announced last week that they think the federal funds rate will remain at close to zero through at least 2023. 

That’s pretty bizarre…and they must have some sort of an amazing crystal ball that we don’t know about.  I don’t know of any Federal Reserve Board that has given 2+ years of guidance in one day. Evidently they’ve turned into economic soothsayers.

As a reminder, the federal funds rate that is set by the Fed and mortgage rates (not set by the Fed) are two totally completely different instruments. 

The Federal Funds Rate

The federal funds rate is the target interest rate set by the Federal Reserve Open Market Committee at which commercial banks borrow and lend their excess reserves to each other overnight.  It really has limited impact on the mortgage market.

I’d invite you to read this article that I’ve written that outlines what really drives mortgage interest rates: https://lendingcoach.net/mortgage-rates-the-fed/ (hint…it isn’t the Federal Reserve).

Mortgage Interest Rates

This graph shows the deviation of the 30-year mortgage versus the federal funds rate – and you can see there’s quite a dramatic difference.

Inflation Worries

Secondly, the fact that the Federal Reserve stated that they are OK with inflation levels over their original 2% target will not help the bond market or mortgage backed securities (the true drivers of mortgage interest rates). 

They stated that they would allow inflation to run moderately above 2% “for some time” – and many in our industry are worried that once inflation gets rolling (and it has been moving up, even in today’s COVID economy) it will be impossible to stop. 

Mortgage rates will be affected by inflation because inflation erodes the buying power of the fixed return that a mortgage holder receives.  And interestingly, the best way to combat inflation is by raising the Fed Funds Rate. 

If inflation begins to rise, and there are already some signs of this, Mortgage Rates will start to climb in response.  All this can absolutely still occur while the Fed Funds Rate is at zero. 

Today’s Opportunity

With all of that said, the current mortgage rate environment presents an incredible opportunity that should be taken advantage of for either a purchase or refinance. Contact me so I can help you benefit before things change too dramatically!

Is Making an Offer Over Asking Price a Good Idea?

Making an offer over the asking price on a house often makes buyers wince.

But let’s face it, paying above list price is just a reality in certain circumstances—at least if you really have any hopes of getting that house!

Is it a good idea?  Well, this article from Realtor.com outlines a few reasons why it might be.  It’s a good read and I highly recommend it.

Reasons to Offer Over Asking

In many parts of the country we are in what would be considered a “sellers market”, so buyers must adapt.  A good rule of thumb: ‘If houses are selling in your neighborhood in less than 10 days, it’s a strong seller’s market’.

Here are a few other reasons you may want to bid more than list price:

  • You love the home and want to make sure you get it
  • You know there’s a bidding war or lots of competition for the property
  • The house is undervalued (comparable sales can help you judge this)
  • There are cash bids on the table

How To Decide

With that said, does it really make financial sense to pay more for a home than the asking price?

The answer is…it depends – and you should do the math to make sure.

My friends at The MBS Highway have put together a tool that helps buyers decide if making an offer over the asking price is a good financial decision. 

Their “Buy Over Ask” tool takes into account a myriad of factors – from the asking price itself to expected appreciation – even to a break-even point that shows the exact month you should expect your return.

In the example above, by offering $7,500 over the seller’s asking price, a buyer’s break-even point is only one month away…and they can expect appreciation of nearly $100K over the next 5 years.  In this case, it looks like paying a bit over asking would be a good idea, indeed.

Find Out If Offering Over Asking Is Right For You

It would be my pleasure to help any potential buyer find out if bidding over list is a good idea. 

Reach out to me and I can easily put together a summary just like the one above for you to help determine if making an offer over the asking price is something you should consider!

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