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The impact of low mortgage rates on the housing market

The battle of low housing inventory and rising demand

Frank-Nothaft-1-1
Frank Nothaft 
Executive and Chief Economist at CoreLogic

This is the third installment of our economist Q&A series. Every Tuesday in December, HousingWire has interviewed a top economist in the HW+ Slack channel. The 2021 housing market forecasts have focused on everything from home sales to mortgage rates.

In this installment, HousingWire interviewed Frank Nothaft, executive and chief economist at CoreLogic, on his forecast for next year. This article has been lightly edited for length and clarity. 

HW: In your commentary you mentioned interest rates will remain low for the foreseeable future. What impact this will have on the housing market?

Frank Nothaft: The housing industry is the most interest-rate sensitive sector in the economy.  When mortgage rates are low, they drive buyer demand and owner refinance, fueling home sales and home purchase and refi originations. We expect home sales in 2021 to be more than in 2020. In fact, we expect home sales relative to the housing stock, a measure of home “turnover”, in 2021 to be above the average annual turnover rate of the prior two decades.

HW: It sounds like we’re expecting another year of high home sales next year. In the battle of low housing inventory versus rising Millennial and other homebuyer demand, who will win and why?

Frank Nothaft: Both, to some degree. The record low mortgage rates have lowered the monthly P&I payment that Millennials face, helping to improve monthly-payment affordability. The low inventory has driven home prices higher, which means Millennials need to have a bigger nest egg saved up for the down payment and closing costs. But higher prices benefit the owners (many of whom are Baby Boomers!) who sell their homes.

HW+ member: Frank, MBA forecasts are still pointing at refi volume getting cut in half in 2021. With a huge refi backlog (I’m one of them) with lenders today and 60%+ of mortgages still being “in the money” for refi, why are economists projecting this drop-off?

Frank Nothaft: Once the population is vaccinated and the pandemic is in the history books, we will likely see an increase in inventory above the acute shortage we have right now.  The increase in inventory will promote home sales and lead to a moderation in home-price growth.

HW: Looking at the people who will be buying the homes, in the past, the industry has been extremely focused on supporting Millennials as they enter homeownership. As we start to see Gen Z buy homes, is there anything else that the industry should know in order to support them or to know what to expect?

Frank Nothaft: Education and information on how to use credit responsibly is important for all prospective home buyers, and even more so for younger buyers.  If Gen Zs are prepared and “credit smart”, that will facilitate their ability to finance a home purchase and transition into ownership.

HW+ member: Does a large number of low-balance loans point toward a cash-out refi opportunity for lenders? Potentially an area of product focus?

Frank Nothaft: Using CoreLogic TrueStandings data, we estimate that there will be about 20 million home mortgages outstanding at the start of 2021 with a contract interest rate of 4% or higher.  We are expecting refinance to continue with strong volumes in the beginning of 2021, but not all of these loans will refinance. That’s because many have a low balance, a recent delinquency, or have been in forbearance, all of which reduces the likelihood of a refinance. As an example, we found that the average unpaid principal balance for loans outstanding with a contract interest rate above 5% was about $100,000. These low-balance loans have been outstanding for a number of years and have a lower probability of refinancing, in part because the monthly payment savings is less than on a large balance loan.  We expect refinance volume to be less than in 2020, but a lot more than during the average year in the preceding decade.

HW: With all this increase in activity and demand, coupled with the low inventory, you mentioned we will see rising home prices – do we run the risk of homes becoming too unaffordable in the year ahead?

Frank Nothaft: Our forecast for U.S. home-price appreciation is it will average 3.4% per year during the next two years, compared with 4.8% per year during the prior decade, as measured by the CoreLogic® Home Price Index (HPI).  This pace will still be faster than inflation (forecast at about 2% per year).  When mortgage rates rise up from the current record low, then homes will become increasingly unaffordable.  When this happens, we expect home-price growth to slow further.  And some neighborhoods may experience price declines, especially those with high unemployment and housing costs.

HW: What implications could this trend have for the housing market?

Frank Nothaft: In 2021, those neighborhoods that have been hard hit by the pandemic recession may be particularly exposed to home-price declines.  Communities that have a local economy largely based on tourism, hospitality, business travel, entertainment and restaurant/retail are likely to have elevated unemployment for an extended period and face home price weakness. These places could see an increase in distressed home sales which will add additional inventory to the local for-sale market.

HW: How heavy of an influence do you see COVID-19 having on the housing market in 2021?

Frank Nothaft: COVID-19 is one important reason we have an acute shortage of inventory for sale.  The pandemic delayed new construction in 2020 and led many prospective sellers to postpone listings: The median age of a homeowner was 57 years in 2019, and with older Americans at greater health risk during the pandemic, many that have contemplated home selling have decided to wait. Once the coronavirus dissipates or a vaccine is widely available in 2021, we expect to see the number of new and existing homes listed for sale to rise.

If you’re an HW+ member and not yet a part of the Slack channel and would like to join, email HW+ Managing Editor Brena Nath at [email protected]

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