5 trends in mortgage lending until 2021 (analysis)



Holden Lewis | NerdWallet

In the second half of 2021, it will be brutal for home buyers here. Mortgage rates will rise, home prices will continue to rise, and buyers will continue to face competition. Here are the trends in the housing market to watch out for in the last months of the year.

Mortgage rates are likely to rise

The 30-year fixed rate mortgages are forecast to rise in the second half of 2021, according to key forecasters.

Fannie Mae and Freddie Mac predict the rate will rise by about two tenths of a percentage point, the National Association of Realtors expects it to rise three tenths of a percentage point, and the Mortgage Bankers’ Association predicts a half percentage point increase.

When you average all of their forecasts, the overall forecast is that 30-year mortgages will average 3.38% over the last three months of 2021, three tenths of a percentage point higher than the 3.08% average second-quarter rate.

I agree that mortgage rates will rise by a quarter to half a percentage point in the second half of the year as wages rise and the Federal Reserve starts talking about tightening monetary policy.

But I don’t have much confidence in this prediction because interest rates are volatile and the chances are that the fight against the pandemic will take one step forward and three steps back. If the resumption of COVID-19 slows the economy, mortgage rates could remain roughly the same or fall even lower.

Housing prices will continue to rise

According to the National Association of Realtors, sales prices for existing homes skyrocketed in the first half of 2021. The median price for a pre-owned home in June was $ 363,300, up 23.4% from 12 months earlier. The average price was at an all-time high.

The rate of price growth in 2021 was unexpected. The spring consensus between Fannie Mae, NAR and MBA was that the average price of an existing home at the end of the year would be around $ 331,500. But the average price for June exceeded the year-end forecast by more than $ 30,000.

Prices rose rapidly because demand exceeded supply. And demand will exceed supply for a long time. Housing prices will continue to rise in the second half of 2021 and beyond.

Housing demand will remain high

Millennials started late. They started families at an older age than the Boomers and Generation X. Now millennials are starting to catch up with their ancestors buying their first homes.

People form a household when they occupy a dwelling individually or together. Americans formed an average of 856,000 households a year from 2013 to 2016, according to a study by the Harvard Joint Center for Housing Research. Household formation then accelerated to 1.3 million per year from 2016 to 2019 (the most recent year for which we have statistics).

This abundant flourishing of family life begins in the late 1980s and early 90s, the most fruitful years of the millennial birth. These babies are now in their 20s and 30s – this is the peak of family formation.

Aside from the rapid formation of households, something else is happening: the desire to own rather than rent seems to be on the rise, as evidenced by the rapid rise in house prices and the prevalence of bidding wars. This shopping frenzy will continue.

Tamir Poleg, chief executive of the startup The Real Brokerage, agrees. “I don’t think the market will cool off in the foreseeable future,” he says. “Even if interest rates rise, demand will still be significant.”

Housing shortages will persist

There are not enough houses because the builders are not building enough. The lack of housing construction dates back to the Great Recession. In 2011, only 585,000 homes were built – less than one third of the total number of homes five years earlier, during the housing boom.

Construction is recovering slowly: 1.287 million homes were built in 2020. Every year, for more than ten years, not enough houses are built to meet the needs of the population. Sam Hather, chief economist at Freddie Mac, estimates a housing shortage of 3.8 million housing units at the end of 2020.

The shortage of millions of homes cannot be quickly resolved. The country is building just over a million houses a year, and its production capacity could be about double. Meanwhile, some 325,000 homes are removed from the housing stock every year, often as a result of demolition (deliberately) or destruction (accidental).

Home construction is unlikely to accelerate in the remainder of 2021. The limiting factor is the shortage of computer chips that control household appliances. If you’ve recently bought a washing machine or refrigerator, you know the choices are limited and the earliest delivery date could be weeks or months away. Your builder doesn’t want to sell a new home without a refrigerator. Lack of sawnwood and other materials, as well as associated high prices, also contributed to the slowdown in construction.

Fed Will Introspect

Policymakers at the Federal Reserve are concerned that their easy money policies are driving house prices skyrocketing and are debating whether they should do something about it.

During the pandemic, the central bank bought monthly mortgage-backed securities during the pandemic. This keeps mortgage rates low. The low rates, in turn, reduce monthly payments, allowing home buyers to borrow larger loans. Larger loans mean people can pay more, resulting in higher house prices in all markets.

But the Fed did not expect house prices to rise at double-digit percentages annually. Some Fed policymakers feel resentful about the results of their policies.

At the Fed meeting in June, some unidentified committee members wondered aloud whether they should cut back on their purchase of mortgage bonds earlier in order to raise mortgage rates and slow the rise in house prices. They did not make any changes to the June meeting, but agreed to continue discussions on this issue.

The Fed strives to be predictable, so it will ultimately likely decide to cut back on mortgage bond purchases on a schedule similar to the one it did after the Great Recession.

Bottom line for sellers and home buyers

Home prices are at an all-time high and buyers often find themselves competing with bidders. Thus, sellers feel uplifted and buyers feel depressed.

According to the Fannie Mae Homebuyer Sentiment Index, 77% of respondents said in June it was a good time to sell, while 64% said it was a bad time to shop. This attitude is likely to continue until the end of 2021 because the supply of homes for sale will not come close to meeting demand.

When it comes to home sellers, you might be thinking, “Well, okay, I think you can move on very easily.” But most home sellers buy too when they retrofit, downsize, or relocate. Selling in this market is sweet and buying is sour.

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Holden Lewis writes for NerdWallet. Email: hlewis@nerdwallet.com… Twitter: @HoldenL


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