I think that one word sums up 2020 pretty well.
As we started the year, we found ourselves becoming educated about what a worldwide pandemic would mean. And the more we learned about the health risks, it soon became very evident just how far-reaching this historical event would be – literally impacting the daily lives of every single person across the globe. Last summer brought a wave of social unrest as the country worked to expose and review causes of injustice, with immense efforts – and support for how people could make a positive impact and effect change. And who could forget the election season we experienced as well?
Those major story lines – the pandemic, the struggles of businesses, the ups and downs of the economy, the nation’s divisions – as well as others, had major impacts on the mortgage and housing markets through 2020. As we turn the calendar into 2021, we look forward to continued progress on a variety of challenges we confronted over the past year. Now, let’s dig into some of our expectations for the housing industry as we head into 2021.
Any expectations people had heading into 2020 were quickly thrown out the window as the world worked to deal with the pandemic. As the enormity of the situation became evident, governments and central banks across the globe began to take drastic moves to stimulate markets. In the U.S., the federal government passed the CARES Act to provide help, including direct stimulus payments and expanded unemployment benefits, for folks struggling to survive. The Federal Reserve cut interest rates and provided substantial liquidity through a variety of programs, and these steps helped calm the markets and provide needed support to millions of struggling citizens and businesses.
After initiating rate cuts in the second half of 2019 to counter economic headwinds, the Fed was pushed to cut rates more drastically by March, as the pandemic gripped the globe. While Fed Fund rates do not directly impact mortgage rates (which are more closely tied to the 10-year Treasury yield), they do typically trend in a similar direction.
While we continue to see positive news related to COVID-19 vaccines, it’s still expected to be several months before their impact is sufficient to fully help society get over the hump. Even with new programs and stimulus efforts, many businesses and people continue to struggle. Because of this, governments are expected to continue various stimulus programs, and there is an expectation of continued uncertainty as the world moves forward.
2020 began with an expectation for slightly increasing rates, continuing what we saw toward the end of 2019, after near-record lows earlier in the year. During the early spring, as markets were trying to get their arms around all the impacts of the pandemic, great uncertainty led to extremely volatile interest rates, with severe drops and increases over a few weeks. As governments stepped in to provide support and liquidity, by early Q2, markets become more comfortable – and that started a downward trend for rates throughout the remainder of 2020. By the end of the year, what many economists had thought impossible – long-term mortgage rates below 3% – became a reality as rates ultimately approached the mid-2% range.
As we head into 2021, the question everyone is asking has changed from “How low will rates go?” to “Have we already hit the bottom?” Of course, it’s impossible to know what the future holds or where the low point is – but as we consider the progress on vaccines, coupled with the reality of a range of mortgage rates many never thought possible, there is a common general expectation that rates will begin to trend upward, slightly, throughout 2021. Don’t worry – the increasing trend is expected to be slow and moderate, with rates at year-end predicted to remain in the low-3% range due to the drawn-out difficulties influenced by the pandemic.
As rates eventually start to increase, they will of course have an impact on overall mortgage activity. Refinances are expected to drop around 20% year over year, since millions of homeowners already took advantage of the lower rates in 2020. However, with interest rates still remaining near record lows, there will definitely continue to be a positive impact on the purchase market, with the industry expecting a slight increase in total purchase activity as well.
As the impacts of the pandemic started to be felt in early 2020, driving enormous job losses and crippling several industries, a variety of program changes across the mortgage industry resulted in tightening credit requirements. What is unique about this wave of changes is that most are viewed as “temporary” in nature, and are focused on specific areas tied to the pandemic. These adjustments are expected to remain in place in the short term before being withdrawn as the world “turns the corner.”
While the pandemic did cause tightening in specific areas, the mortgage industry also continued to see some expansion, especially as we grapple with affordability and rising home prices. The realities of student loan debt and lack of resources for down payments continue to affect many potential borrowers, and there continue to be new alternatives to help first-time homebuyers and others achieve homeownership.
As we move through 2021, we expect the temporary guidelines installed this past year will be pulled back, which would equate to continued, yet appropriate, loosening of credit requirements in support of a healthy financing environment.
One trend over the past couple years has been a lack of housing inventory in most price ranges to support market demands – and without question, the pandemic made this problem even more severe. Many potential sellers decided not to list their homes, due to concerns of exposure through the normal selling and buying process, uncertainty around job stability, and the decision by many to stay put and take advantage of record low rates by refinancing instead of moving.
But stabilization of certain sectors of the economy, along with continued rate drops, drove very strong purchase demand. This strong demand for inventory, coupled with decreasing listings, led to a year of very strong price appreciation. For a while, it seemed every home listed for sale was moving in hours or days, not weeks or months, with sellers receiving multiple offers as the norm. Even heading into 2020, the availability of entry-level housing inventory was concerning, and as the year played out, the issue became even more severe. Prices continued to rise in most price ranges. However, the impact on the lower end of the price range was more dramatic. As the industry absorbs these trends, there continues to be a focus on finding solutions for more affordable housing alternatives, with continued expansion in financing alternatives for condominiums and manufactured housing to aid in that mission.
Over the past couple years, new construction activity has lagged demand for a variety of reasons. 2020 brought increased demand as consumers looked for things they had not in the past: home offices, exercise rooms, more entertainment options, and in some cases relocating away from higher-density areas as flexible work alternatives became a trend. This led to an explosion of activity in new construction, which was sorely needed. However as we moved into the second half of the year, material costs began to skyrocket as manufacturing chains were significantly disrupted, and the continued tight labor market to support the demand also began to slow production levels. While production increased dramatically through the year, more is needed – especially in the low to moderate price ranges, as there remains a significant gap in what the market could absorb.
Although there doesn’t seem to be an easy solution for the challenges limiting new construction activity, the market heading into 2021 is by all accounts considered healthy, with builder sentiment continuing to be very positive.
As we look forward to 2021, we first must review what we all experienced over the past 12 months. The world experienced an environment we had never seen before – and while there were situations that could be considered the worst we could imagine, there also were many, many examples of the best in people shining through. As we reflect on the past, what we learned will make us stronger, and ultimately lead to a better place for all moving forward as we strive to make a positive impact on those around us.
We’re excited about the future, and there’s much to be optimistic about. Based on economic forecasts for 2021, it appears rates will remain very attractive (especially when considering historical levels), offering great financing options for buyers and those looking to refinance. Home appreciation is expected to continue, but at a more modest, healthy pace for the majority of the country, and the industry continues to bring creative solutions to the market to support today’s homeowners.
Using new and improving technology, coupled with good old-fashioned professionalism, competitiveness and customer service, we expect great things for Bell, and our business partners and clients, in 2021 as we apply our company’s values of family, service and giving back to the communities we serve.