Many families were caught financially unprepared with the sudden onset of the pandemic. What seemed foreign and far away became domestic and close to home. The World Health Organization declared a global pandemic on March 11, and President Donald Trump announced a national emergency on March 13. Shelter-in-place directives proliferated across many communities and open houses canceled. The once-promising 2020 spring home-buying season, possibly the best since before the Great Recession, was slowed to a snail’s speed. The U.S. unemployment rate spiked from a 50-year low of 3.5% in February to an 80-year high of 14.7% in April.
The speed of the housing recovery from April’s trough has been impressive. The rebound was supported by accommodative fiscal and monetary policy. The sudden loss of income triggered by the pandemic was partly muted by an income tax refund for eligible taxpayers, enhanced unemployment insurance payments for laid-off workers, and small business loans to maintain employment through the Paycheck Protection Program. The Federal Reserve took immediate steps to cut short-term interest rates to near zero and accelerated their purchases of U.S. Treasury bonds and Mortgage Backed Securities to lower long-term yields.
The record low interest rates on fixed-rate mortgages fueled the largest refinance boom since 2012 and led a snapback in home sales. By July sales were above year-ago levels. The spring home-buying season had not been extinguished but only delayed to a summertime boom. But what does next spring’s housing market have in store?
There is a heightened amount of uncertainty on the market outlook given the difficulty of forecasting how the pandemic will evolve. A reignition of COVID-19 could prompt a national shelter-in-place order and a double-dip recession. At the other end of the gamut, new medical treatments and a vaccine could put the pandemic behind us and usher in a vibrant economic recovery. Something between these two extremes is the most likely outcome, with economic growth creating millions of jobs, but with the unemployment rate remaining elevated above 7% for most or all of 2021.
Housing and mortgage outlook
Interest rates on fixed-rate mortgages reached record lows in early September, hitting below 3% at 2.86% for 30-year and 2.37% for 15-year. The median contract rate on home mortgage loans outstanding at mid-2020 was 4%, according to the CoreLogic TrueStandings database, indicating that a large number of home loans remained in-the-money to refinance. Approximately $5 trillion in home mortgage debt, or nearly 25 million home loans, had a contract rate of at least 4%. Not all of these loans will refinance, as some borrowers have insufficient home equity or income (many because of unemployment), or a too-low credit score to qualify for the lowest market rates.
Nonetheless, a mega refinance boom has generated the largest origination market in years. The Mortgage Bankers Association has projected more than 6 million refinance originations and 10 million first-lien originations in 2020, the largest refinance market since 2012 and highest first-lien origination totals since at least 2006.
And interest rates are expected to continue to remain low throughout 2021, providing additional support for home sales and refinance. On June 10, the Federal Reserve released the latest views of the 17 officials who participate in the rate-setting meetings, which showed that all expect to hold the federal funds target at the current near-zero level through the end of 2021. With the Federal Reserve continuing to purchase MBS, interest rates on 30-year fixed-rate mortgages will likely remain near 3% throughout 2021.
The outlook for mortgage loan performance is not as sanguine. The homeowner’s path from mortgage-payment currency to foreclosure proceeding generally involves two important trigger events. One is a sudden loss of income, often the result of unemployment. Several states had an unemployment rate in the mid- to upper-teens as of July, three to four times the rate in February. Many homeowners have struggled to remain current on their mortgage loans during the pandemic, resulting in a jump in mortgage nonpayment. While federal income tax rebates and unemployment insurance supplements helped to ease the income loss, many who lost their jobs had limited savings to rely upon to remain current on their mortgage.
The second trigger is loss of home equity, generally because of a fall in home prices. Places that have a larger share of employment in the travel, hospitality, retail, entertainment and restaurant sectors have been particularly hard hit and are at greater risk of price declines in the coming year. Homeowners that currently have a high loan-to-value are vulnerable to losing the equity they have when prices decline.
The CoreLogic Home Price Index has registered strong appreciation through July 2020. This has reflected the shortage of inventory listed for sale – inventory in July averaged 25% below year-ago levels, according to CoreLogic Multiple Listing Service data – and rising demand by Millennials who see record-low mortgage rates as providing the opportunity to become a first-time owner or to trade up from their starter home. But the HPI Forecast is glum: The chart shows expectation of elevated unemployment in 2021 sapping buyer demand and the prospect of distressed sales adding to for-sale inventory leads to a projection of U.S. HPI growth slowing to 0.6% in the twelve months ending July 2021 and HPI declining in eleven states.
To illustrate the double-trigger scenario, Nevada has been especially hard hit because it has a large share of employment in hard-hit sectors: Nevada’s unemployment rate in July was 14%, and the CoreLogic HPI Forecast predicts a 6% price decline in the coming year through July 2021. Borrowers who were economically impacted by the pandemic recession and eligible for forbearance under the CARES Act may have seen additional erosion in home equity as the forborne payments were added to the loan balance. For example, a borrower with a $200,000 loan at 4.5% interest that had six months of forborne payments added to their loan balance would have about a 3% (or $6,000) increase in their loan balance.
As of March, 3% of Nevada homeowners with a mortgage already had negative equity, and another 3% had 10% or less home equity. Thus, if prices fall 6% and if borrowers with loan-to-values over 90% opt for forbearance, as many as 6% of mortgaged homes may be at heightened risk of foreclosure or short sale if unemployment remains high.
Elevated unemployment in 2021 may discourage younger Millennials from forming their own households and adding to rental demand. The CoreLogic Single-Family Rent Index has already recorded a dramatic deceleration in rent growth, from an annual increase of 3% in February to 1.4% in June 2020 with further slowing expected. Still, this may be better than the 2% rent decline predicted for apartment buildings in the latest Urban Land Institute survey, as tenants may shun high-rises for the lower density offered by a single-family rental home. This could be an ongoing legacy of the pandemic.
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