There has been a lot of upheaval this year, but one thing is for certain, it has been a phenomenal year for mortgage interest rates. Fueled by concerns over the coronavirus and, slightly lesser so, the economy, rates have been on the downslide since the first quarter. Most industry experts didn’t forecast rates to drop below the 3% mark but by mid-July, they were changing their tune. How will these historically rock bottom rates impact real estate in Silicon Valley and beyond?
Founded in 1970, Freddie Mac began keeping record of mortgage rates in 1971. During that almost 50-year period, never once did they report rates falling below 3% – until mid-July when the average rate for a 30-year fixed mortgage dropped to 2.98%. Only a few weeks later, in early August, rates declined yet again to 2.88% for an average 30-year fixed and 2.44% for a 15-year fixed. On September 9th, CNN reported a 9th record low for a 30-year fixed loan of 2.86% with 15-year mortgages hitting a never-before seen 2.37%.
“Mortgage rates have hit another record low due to a late summer slowdown in the economic recovery,” said Sam Khater, Freddie Mac’s chief economist. Khater goes onto say that as we move into the autumn months, the home buyer enthusiasm generated during the spring and summer will wane due to the lack of inventory.
Realtor.com’s senior economist George Ratiu states, “Home buyers continue placing offers on homes, pushing existing inventory toward historic lows.” Joel Kan, the Mortgage Bankers Association’s (MBA) associate vice president of economic and industry forecasting shares that purchase activity remains heightened, with new mortgage applications the week ending September 4th increasing almost 3% from the week before. The average loan size is also ticking upward, placing yet another record since MBA began tracking this data in 1990.
Although mortgage rates have hit almost rock-bottom rates, Ratiu explains that, because of low inventory, demand is driving up home prices to approximately 11% more than this time last year. The inventory issue is impacting would-be sellers, who would love to take advantage of the impressive 11% price increase but are themselves unable to find another home to purchase.
This price increase is contributing to the erosion of the buying power of low rate mortgages. “For many young, first-time buyers, the shift is reducing affordability, just as they are ready to embrace homeownership,” says Ratiu.
Fannie Mae continues to forecast a decline of mortgage interest rates into 2021, predicting slightly below 3% for 30-year fixed and 2.5% for 15-year loans. If you own a home, it is time to consider refinancing if you haven’t already done so. Lenders have implemented stricter qualification and credit standards for both refi’s and mortgages.
These historic low rates bode yet another future impact – those who lock in an incredibly low mortgage rate may be deterred from up or downsizing in the future because odds are not in their favor with regard to getting an interest rate anywhere near what they currently enjoy.
“Current homeowners as well as home buyers that lock in low rates might be reluctant to trade up to another house in future years if doing so also means trading up to a meaningfully higher rate,” said Greg McBride, chief financial analyst at Bankrate. “The added buying power of today’s low rates will prompt many first-time buyers to skip over the starter home.”
In a year filled with uncertainty, one thing is for certain: homeownership is always a worthwhile investment, especially in Silicon Valley.