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Low Mortgage Rates and High Home Prices Shatter Records, But Will It Last?

As home prices shoot up across the country, wages stagnate and millions face unemployment, homeowners and buyers alike want to know if the currently on-fire real estate market, nicknamed “boom in the gloom,” is in for a cooldown.

Despite a chaotic year, experts are still betting on housing.

By and large, the pandemic housing market has defied all expectations by outperforming the 2019 market in both volume and price. New home sales in September outpaced sales in the same month in 2019 by 32%, according to the Census Bureau.

And this isn’t because home prices were easy on the wallet. On the contrary, prices soared in August by 8% year-over-year, according to the Federal Housing Finance Agency’s latest U.S. House Price Index.

Of course, exceptionally low mortgage rates are tempting buyers, but even dirt cheap loans aren’t enough to offset high home prices in nearly every market.

In fact, median-income earners—those who made $72,900 annually—were only able to afford 58.3% of new and existing homes sold between the beginning of July and end of September, according to recent data from the National Association of Homebuilders. This is down from 59.6% in the second quarter of this year.

Home Prices May Fall, But Expect Mortgage Rates to Remain Low

The perfect storm of soaring home prices, wage growth stagnation and economic uncertainty due to Covid-19 will result in a home price correction, says James Stack, president of InvesTech Research and Stack Financial Management in White Fish, Montana.

“When you’re seeing the kind of a boom that leads to speculation and a disparity between prices and value, that’s where risk is created,” Stack says. “This high valuation has happened over the last 18 months, making homes unaffordable. Housing prices are most likely at their high. If interest rates increase we’ll see prices go down.”

So far, there’s no sign of mortgage rates rising. On Thursday, rates for the 30-year fixed-rate mortgage hit their 12th record low for the year, falling to 2.78%, according to Freddie Mac.

Rates are staying low thanks, in part, to major help from the Federal Reserve, which implemented a $1.25 trillion program to buy mortgage-backed securities (MBS) in order to inject liquidity into the market. The Fed spends about $40 billion per month on MBS and they plan to continue, at least for the foreseeable future. During Thursday’s Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell pledged to continue this program.

“Over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed said in a statement.

Most experts predict that rates will stay low going into 2021, which will help to sustain lending activity.

Softening Prices, Not Bursting Bubbles

Low housing inventory is keeping home prices up, a scenario that makes sense. Scarcity typically drives up value, so as home construction picks up, experts predict that prices will soften, especially in overheated markets—but not crash, thanks in part to the current supply-and-demand equation.

Currently, there’s a housing deficit of about 1 million homes nationwide, with current inventory of resale and new single-family housing below 4 months’ supply.

“Given favorable homebuying demographics and historically low interest rates, this tightness in inventory has caused home prices to rise faster than income, harming housing affordability,” says Robert​ Dietz, senior vice president and chief economist at the National Association of Homebuilders.

The current pattern of eager buyers moving from urban cores to more affordable suburbs and even exurbs is also a good indicator that the market will remain strong.

This is especially true as millennials—the largest share of first-time homebuyers—get older and begin to have families. As Covid has changed work patterns, allowing people to work remotely, many of these buyers are moving away from big cities to more affordable areas.

Additionally, repeat buyers are upsizing in more rural areas as home offices and outdoor space has become a bigger priority since Covid.

“Let’s keep in mind that as demand moves out from core areas to inner suburbs, exurbs and even rural markets, the rising number of individuals in their 40s and 50s, prime homebuying years, will also increase. These are bullish indicators for single-family housing demand and construction,” Dietz says.

Forbearances Are No Big Risk to the Market

Currently, 5.4% of mortgage borrowers, or 2.9 million, are in active forbearance plans, which is slightly lower than the 5.7% from last week. In total, these mortgages are worth $584 billion in unpaid principal, according to data from Black Knight, a real estate data analytics company.

On paper, this can be an unnerving picture; however, today’s homeowners have options, says Michael Fratantoni, chief economist and senior vice president of research and industry technology for the Mortgage Bankers Association (MBA).

Homeowners facing financial hardship due to Covid might be able to exit forbearance and modify their loan, depending on their lender and their financial situation. A loan modification would change the terms of the loan (this might include lowering the interest rate, a principal reduction or a longer mortgage) in order to make the mortgage affordable.

However, for homeowners who don’t qualify for loan modifications, or still wouldn’t be able to afford the mortgage even with one, selling their home is still a good move.

Unlike the perilous times of the 2008 housing crisis when homeowners were underwater with their mortgages (they owed more than their home was valued at), many of today’s homeowners have record levels of equity in their home. About 3.5 million, or just one in 17, mortgaged homes in the third quarter of 2020 were seriously underwater, according to ATTOM Data Solutions.

“Supply constraint and rising prices means that if you have a homeowner who loses their job they can sell their home pretty fast in almost every market,” Fratantoni says. “If they bought a couple years ago they will sell and have money in their pocket.”

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