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Record-Low Mortgage Rates Won’t Save the Housing Market

Last Updated September 23, 2020 2:01 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:01 PM
  • The U.S. housing market is bouncing back quickly, fueled by record-low mortgage rates.
  • The housing shortage is worsening, further increasing home prices.
  • Low-income Americans can’t afford a house despite low mortgage rates.

The pandemic has hit the U.S. housing market hard. Millions of Americans have lost their jobs and did little shopping because of the lockdowns, including big purchases like a home.

According to the National Association of Realtors  (NAR), pending home sales plunged  21.8% in April. That’s the most significant decline in nearly two decades.

Homebuyers Are Flocking Back To The Housing Market

However, as the U.S. economy opens up from the pandemic, buyers and sellers are rushing back into the housing market.

The latest Mortgage Bankers Association  (MBA) weekly survey showed that purchase activity increased 21% for the week ending June 12 compared to the same week a year ago.

Record-low mortgage rates are fueling the housing market’s V-shaped recovery.

The volume of mortgage applications to buy a home spiked 4% last week  from the previous week and was 21% higher than a year ago. The increase marked the highest volume in 11 years and the ninth consecutive weekly gain.

The rate on a 30-year fixed mortgage hit a new low in the MBA survey , falling to 3.30% from 3.38%.

mortgage rates 2020
Fixed 30-year mortgage rates in the U.S. averaged 3.30% in the week ending June 12, down 8bps from the previous period and the lowest on record. | Source: Tradingeconomics.com 

Fannie Mae expects record-low mortgage rates  through 2021.

Higher Earners Are Buying Houses

But not everyone who wants to buy a house will be able to participate in the housing market recovery.

Homebuyers are mostly higher-income earners who have been less impacted by unemployment than low-income earners.

Americans with incomes above the median have a higher homeownership rate than those with incomes below the median  (78.8% versus 51.8%).

Ownership rates are also higher in older households than in younger ones (over 70% for those aged 45 versus 61.5% for those aged 35 to 44 and 37.3% for those under 35).

The MBA data show that mortgage applications backed by the Federal Housing Administration (FHA) declined in volume from 11.5 % the week before to 11% . FHA loans target those with lower incomes, credit scores, and down payments.

The lack of affordable housing remains a problem for low-income homebuyers.

Matthew Speakman, an economist at Zillow, said :

A shortage of affordable housing in many areas of the country was a problem before the pandemic and the issue has not improved since. The number of affordable for-sale homes on the market currently remains historically low, which is keeping home prices afloat — and even increasing in the midst of a pandemic.

Homes are Getting More Expensive

The demand for housing has intensified in recent years due to natural population growth. And low mortgage rates have increased the number of buyers.

But there are not enough homes for sale to meet the soaring demand. Home prices have been increasing for many years. They have continued to rise during the pandemic as the total listings of homes for sale fell significantly.

The median price of existing homes for all housing types in April was $286,800 , up 7.4% from April 2019 ($267,000), as prices rose in all regions.

Lawrence Yun, NAR’s chief economist, said :

Record-low mortgage rates are likely to remain in place for the rest of the year, and will be the key factor driving housing demand as state economies steadily reopen. Still, more listings and increased home construction will be needed to tame price growth.

Tightening lending criteria are also stopping low-income earners and young people from buying a home. Many lenders require a higher credit score and bigger down payment. It’s challenging to save thousands of dollars for a down payment when you are struggling to pay your bills.

As home prices continue to increase, and credit remains tight, the housing market is less accessible for low-earning Americans. The wealth gap is widening.

The housing market needs a massive boost in supply, which will alleviate the housing shortage and tame the rapidly rising house prices.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.