What 2020’s Mortgage Landscape Could Mean for 2021

Published on January 11, 2021

The spread of COVID-19 affected all aspects of life and completely shifted many industries. For the real estate market, that meant plummeting interest rates and sky-high demand for homes. Now, as a tumultuous 2020 comes to an end, many are wondering what’s in store for the mortgage landscape. Are these low rates here to stay? Will next year still be a good opportunity to purchase a home? The short answer is yes.

To understand where we are headed, it’s important to know first how we got here. As soon as the pandemic hit, a few key things happened. The secondary market panicked, which made rates drop drastically to the 2% range versus a 4% of 5% interest rate just weeks prior. While that certainly gave buyers more purchasing power, inventory was lower than in the past 10-12 years because homeowners didn’t want to list their houses. Health and safety were paramount in those early days as we knew so little about the virus. So, having strangers walking through a home was off the table for potential sellers.

And at first, Zillow economists have found that purchases on a national level dipped after a bleak economic outlook. But, that turned around quickly, and demand skyrocketed. The demand was high, not just because of rates but also because of the mass exodus from major cities. That was in addition to many companies allowing employees to work remotely. And when that happens, Americans across the country have a choice of where they want to live. Do they really need to pay high taxes and have a high mortgage?

So, several factors came to a head that’s led us to where we are today. Now armed with more knowledge and less panic, we’re able to more confidently predict what’s to come for the housing market in 2021.

Mortgage rates will stay low

Those record-low mortgage rates in 2020 are not going anywhere. There is still a lot of economic uncertainty ahead in the coming months, which will keep rates low, at least for the first portion of the year. When the economy and pandemic situation starts to stabilize, we could see a slight uptick in the latter part of the year. But interest rates will not reach pre-pandemic levels for quite some time. This will continue to help first time home buyers have more buying power. So, someone who could afford a $300,000 house in January 2020 can now afford a $375,000 house in January 2021 because the lower rates make monthly payments more affordable on a more expensive house.

Home values and prices will increase

Home values rose dramatically in 2020, and that will continue in 2021. With a bigger need for housing, especially in high-demand areas like New Jersey, Florida, Texas, etc., and rates and inventory being so low, values will continue to increase across the board. Even if there is an adjustment, it’s going to be a minor one. Until the inventory really picks up to the point that there’s more inventory than the demand, values won’t come back down or change drastically. This means potential homebuyers should continue to expect houses to be listed for more. But it also gives homeowners not interested in selling an opportunity to tap into their increased equity to upgrade their current home, pay off other debts, or get rid of mortgage insurance.

With the increasing home values and price increments, potential homeowners may consider various funding sources to secure a property. Fortunately, available home programs, including FHA loans, help individuals pay for homes. The surge in housing prices is welcoming news for about the 65% of American homeowners looking to sell. However, it poses a troubling time for the increasing number of Americans being completely shut out of the housing market.

Remote work will drive demand

Low interest rates and a mass exodus from cities certainly contributed to the rise in demand in 2020. But it’s the remote working capabilities that will continue to drive it into 2021. Many business owners have learned over the past year if remote work is feasible for their companies. And for many, the answer was yes. So, we’ll start to see more remote workers, which means the demand for housing will increase. More people will have options of where they want to live and could choose places with lower taxes, better weather, etc. If they don’t have to go into a city to work every day for the foreseeable future, it doesn’t make sense to spend money on that housing. Plus, they have more buying power now than ever, granting them the opportunity to buy a nicer home they previously wouldn’t be able to afford. That’s an unbeatable force behind a housing demand.

Sales will stay steady (and increase slightly)

Home sales certainly picked up in 2020 with that mass exodus and plummeting interest rates. That will stay steady in 2021 for two reasons: buyer demand and home equity remaining high. But now, with the vaccine coming out in 2021, we could see an increase in the number of sales. Why? Well, those homeowners who previously felt unsure listing their home will now feel more comfortable allowing potential buyers into their home. What’s more, is that the remote workforce will start shopping for homes in different locations, expanding the area for potential sales bumps. And that’s on top of the pre-pandemic boom of young people starting families and moving out of cities. The pandemic simply accelerated it. In fact, over 6 million homes are expected to sell in 2021, according to average forecasts from Fannie, Freddie, NAR, and MBA. That’s a 4.7% increase over 2020.

Borrowing restrictions will remain

Although borrowing power will stay high, potential home buyers should also expect some restrictions to remain. When the pandemic first hit, lenders were very nervous. Millions of people were losing their jobs, and the economy was in bad shape. While that initial shock has subsided, there is still uncertainty about the economic future of the country. That means lenders are more careful in who they will let borrow. So, to mitigate the risk, they’ve imposed some restrictions like adding overlays, requiring higher credit scores, and asking for proof of employment. This just means prospective 2021 homebuyers should start the process early to ensure a smoother transaction.

Michael Sema is the President of Get A Rate and a mortgage lending trailblazer. Michael began his career in 2004 at a typical NJ Mortgage Company where he learned about home financing fundamentals.  Leaving in 2006, Michael sought to build a business with the customer experience in mind.  As the President of Get A Rate, Michael puts consumer preferences first; customers can “get a rate” at their convenience at anytime, anywhere.  Michael continues to educate homebuyers and help them accomplish their financial goals while paving new ground in the mortgage industry.

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