3 Reasons Why 2020 Will Go Down as The Year of The Lowest Mortgage Rates in Recorded History (Among Other Things)
As news outlets and influencers across the internet have reported ad nauseum, 2020 was indeed a year of unprecedented times. And when it comes to mortgage rates, that characterization certainly holds true. Despite fears of a real estate bust as the coronavirus turned the world on its head, record-breaking-low mortgage rates became the new normal in 2020. In fact, rates broke their own record-low a whopping 16 times by the year’s end.
Let’s take a look back at the factors that led to 2020 becoming a record-breaking year for mortgage rates, and explore predictions about where markets will take rates in the new dawn of 2021.
1. Investor Response to the Coronavirus Outbreak
In early 2020 as news of the coronavirus outbreak in China emerged, investor concern over how it would impact financial markets led to a surge in the U.S. bond market. This occurs when investors view the stock market as too volatile or uncertain and opt instead to put their money in the relative security of bond investments, including mortgage-backed securities (MBS). As investors compete to buy mortgage bonds, their prices increase. In turn, mortgage rates, which are usually based on MBS prices, decrease.
Over the course of the first few months of 2020, as the coronavirus outbreak spread from China and made its way stateside, investors continued to indicate their concern by pouring money into the bond market. In response, mortgage rates steadily declined, falling from 3.51% in January to a 50-year low of 3.29% in March, according to Freddie Mac’s Private Mortgage Market Survey (PMMS).
2. Rising Unemployment and Decreased Consumer Spending
By the first quarter’s end, states across the nation had issued lockdown orders in response to the coronavirus pandemic. Predictably, unemployment spiked and consumer spending plummeted. Enter the Federal Reserve.
The Federal Reserve System, commonly known as “the Fed,” is the central bank of the United States. The primary function of the Fed is to monitor and at times manipulate, the U.S. economy to minimize the risk of the financial crisis and protect consumer interests.
In its efforts to keep both housing and financial markets afloat as financial hardship fell over our nation like a thick fog, the Fed announced it would make unlimited MBS purchases as a means to stabilize markets and drive economic activity.
Increasing MBS spending is the Fed’s method of controlling the federal funds rate or the rate on overnight loans made between banks. When the Fed makes MBS purchases, the federal funds rate lowers. In turn, this allows banks to lower their interest rates on the loans made to businesses and consumers, such as mortgages.
By June of 2020, the Fed was purchasing around $4.5 billion a day in MBS, pushing rates down even further. In July, rates fell below 3% for the first time in the 50 years of Freddie Mac’s survey.
3. Increased Homeowner Refinancing
With rates hitting all-time lows month after month, homeowners flocked to refinance, making MBS and mortgage bonds all the more attractive to investors. And while economists suggested refinancing savings would help reinvigorate consumer spending, by November weak spending data had again driven rates down to their lowest ever at 2.72%.
What to Expect from Mortgage Rates in the Year 2021
2020 ended with a bang, in terms of mortgage rates at least, with rates settling at another all-time low of 2.67% by December’s end. But can we expect these historically low rates to continue into the new year? Well, maybe yes, maybe no.
The Fed has stated it has no plans to raise interest rates above their near-zero level any time soon, which will likely keep rates hovering below 3% during the first quarter. However, economists predict that as the COVID-19 vaccine becomes more readily available we will see a resurgence in consumer spending and rates will inch up to around 3.1% by year’s end.
Homeowners interested in refinancing should act now to take advantage of current rates, which were at 2.77% as of January 21, before they begin to increase as the month tick by. And while potential homebuyers looking to take out a new mortgage may have a bit more time to enjoy rates below 3%, they would still be wise to act sooner rather than later. Because if we can be certain of anything, it is that nothing is certain in these (still) unprecedented times.