Midway Through 2021, Here’s Where the Mortgage Market Currently Stands

Published August 27, 2021 | 10:37 Am

After the tumultuous rollercoaster of a year that was 2020, we all entered into the new year with hopeful anticipation of a return to normalcy, and perhaps even some blessed predictability. And with the COVID-19 vaccine becoming more readily available as well as the polarizing presidential election year behind us, we had very good reason to remain optimistic.

hands with latex gloves holding a globe with a face mask

Sure enough, the early months of 2021 were marked by a decline in COVID-19 cases, a relaxation of coronavirus-related mandates, and an uptick in economic activity. As is typical, mortgage rates followed suit of these optimistic economic developments, creeping up to a year-to-date high of 3.18% in late May, and early April.

But as we enter into the second half of the year, the days—and mortgage market—are once again becoming marked by uncertainty. And, once again, the catalyst for these uncertain times is the COVID-19 virus, this time as a result of the emergence of the highly-transmissible Delta variant.

Here is a look at how the pandemic and current economy are impacting the mortgage market today, and predictions for what the landscape may look like as we approach the end of the year.

Mortgage Interest Rates.

Perhaps the aspect of the mortgage industry most heavily impacted by ever-evolving societal and economic factors, mortgage interest rates have steadied at or below the 3.00% mark for the majority of the second quarter.

After peaking in April, rates for a 30-year fixed-rate mortgage have risen above the 3.00% marker only once in the past four months. In part, rates have been kept down by increased economic concern caused by the influx of COVID-19 cases in recent months.

Despite currently low rates and fears surrounding the pandemic, a rate hike by The Federal Reserve System (the Fed) is not out of the question. For one, the July jobs report revealed better-than-expected numbers, an indication that the economy is recovering after the lockdown-related recession of 2020. Additionally, it is anticipated that the Fed will soon begin tapering its purchasing of mortgage-backed securities (MBS), a program the Fed initiated to stabilize markets and drive economic activity in the wake of the pandemic. It has yet to be announced when the Fed will begin tapering its MBS purchasing, but we can certainly predict a rise in interest rates when it does.

For now, as rates remain at record lows, it continues to be a good time for current homeowners to refinance. And, should potential homebuyers be able to find an available home within their price range (more on that in the next section), they can still benefit from the very low rates for the duration of their mortgage term.

Home Prices and Inventory.

Defying all expectations, the housing market was hot throughout mid-to-late 2020. After the shock of the initial COVID-19 outbreak and subsequent lockdowns subsided, the housing market adapted surprisingly well. Professionals in the industry moved to digital methods to continue selling homes, rates plunged as the Fed pumped money into mortgage-backed securities, and we all seemingly became loathsome of our own four walls. All of these factors combined to create a seller’s market, where houses were in high demand and supply was low.

As of mid-year 2021, it has remained largely a seller’s market. And although July showed an increase in supply, prices are predicted to remain high as demand continues to outpace supply. In July, prices were up 17.8% year-over-year but did indicate a slight decrease from the previous month of June. This decrease from June pricing is due in large part to the 2% increase in supply from one month to the next. Even this very slight housing supply increase is easing pressure on buyers and creating a less competitive market than buyers have faced over the past year. Sale growth, however, is primarily being seen in the higher-end markets, as inventory for starter homes is still limited.

Likewise, despite buyers finally seeing some relief in the form of an increase in homes available for purchase, the market is still far from balanced. As of July 2021, only a 2.6-month supply of homes was available. In comparison, a 6-month supply indicates a balanced market.

Loan Origination Landscape.

In January, the Federal Housing Finance Agency (FHFA) released new limits on the GSEs Freddie Mac and Fannie Mae, restricting the GSE’s ability to purchase second-home, investor property, and other “high-risk” loans. These caps caused industry concern that the new limits would unnecessarily disrupt the market and create instability since about half of all mortgage loans are federally backed.

Fortunately, a renewed interest in mortgage bonds from private financial institutions is making it easier to unload these types of loans, despite the GSE caps. This growth in the private-label mortgage market—where private financial firms pool home loans to sell as mortgage bonds—is actually due at least in part to the GSE caps of earlier this year. These caps created a gap in the market for selling loans on second homes, investor properties, and those made by self-employed borrowers. This a gap that private financial institutions are ready and willing to fill thanks to market growth and the higher yields mortgage bonds offer compared to government-backed securities. Although the private market accounted for only 4% of all mortgage bonds last quarter, that is still the largest percentage we have seen since the pandemic began, and it is nearing the largest market share since the financial crisis of 2008.

Interest from the private sector is also allowing loan originators to be more flexible when underwriting loans for a wider array of borrowers. For example, a self-employed borrower may be able to use alternate documentation, such as bank statements rather than pay stubs or W2s, to prove income. With less than 6% of alternative documentation loans becoming delinquent as of July 2021, investor confidence in these types of non-conforming loans continues to strengthen. As such, we should continue to see more flexibility in the loan origination process as the private market continues to grow.