The coming years should be favorable for current homeowners and prospective homebuyers, according to new research from CoreLogic.
In a three-year housing and mortgage outlook, the firm predicted that mortgage rates should remain low for the foreseeable future, and that more millennials will begin owning their own homes.
Here’s a more detailed look at what real estate analytics firm CoreLogic found.
Mortgage rates stay near 3 percent for years to come
While CoreLogic predicts a slight rise in average mortgage interest in the next few years, rates should remain around a full percentage point lower than they were in the last decade, at least into 2023.
“We’re going to start off 2021 with a continuation of an extremely low-rate environment,” said Frank Nothaft, executive and chief economist at CoreLogic.
He expects average interest rates in 2021 to be lower overall than the 2020 average.
CoreLogic predicts that the average rate between 2020 and 2023 on 30-year fixed mortgages will be 3.2 percent, with rates generally expected to take an upward trajectory through that period.
“It’s very good news,” Nothaft said. “If you have an existing mortgage with an interest rate of 4 percent or higher, gosh, there’s a lot of incentive to refinance.”
There are about 20 million outstanding mortgages in that rate bracket, and he expects as much as a quarter of those to be refinanced in 2021. The refinance market should cool off a little in the coming year after the initial flood in 2020, but, Nothaft said, “there are still a lot of borrowers that have a lot of incentive to refinance.”
Meanwhile, low mortgage rates will continue to encourage more people to buy real estate for the first time, or to upgrade to more expensive properties.
“For home purchase, mortgage interest rates are about 1 percentage point lower than they were a year ago,” Nothaft said, noting that translates overall to a lower principal mortgage balance and interest payment compared to a year ago. “That’s what’s going to be an important driver of homebuying for those families who have jobs, have good credit, who have their financial house in order. They are well-positioned to take this opportunity afforded by record-low mortgage rates to buy a home.”
The downside of cheap mortgages
These mortgage rates haven’t happened in a vacuum, however. As borrowing money became cheaper in an effort by the Federal Reserve to jump start the economy wrecked by the pandemic, more buyers started competing for a dwindling number of houses.
“Prices are up 7.3 percent for the month ending in October compared to the same house a year ago,” Nothaft said. “That’s the other face of affordability. Earlier I emphasized how record low mortgage rates reduce the principal and interest, but the flip side is that higher home prices mean you need to have a lot more cash in the bank in order to make that purchase. That flies in the face of affordability.”
Even so, Nothaft said that the benefits from cheaper borrowing should outweigh the higher upfront costs for most prospective homebuyers.
“I think we’re going to continue to see strong first-time homebuyer activity in the coming year,” he said. “We’re going to see sales up in 2021.”
The millennial market
Millennials should start entering the home market at ever-increasing rates in the coming years, CoreLogic predicted.
After a long trend of millennials putting off homeownership, the conditions have ripened for a large share of that age group to transition from renting to buying.
“A lot’s been written about this delay to move out or launch,” Nothaft said. “Some of it reflects this relatively high cost of housing, and the fact that millennials, especially those that were entering the labor market in 2008, 9, 10, 11, 12, were entering a market where unemployment was high.”
But, he said, the tide appears to be turning.
“We’ve seen increasing numbers of millennials that had their financial house in order that have been able to get a good-paying job and make that transition to homeownership.”
Nothaft pointed out that millennials reached other life milestones — like getting married and having children — later than older generations. But, as more millennials do those things, their housing needs have changed.
“Once you start having kids, that kind of changes your view on how much space you need, and your view on whether you want to have a yard where you live.” Nothaft said. Millennials, he added, have “finally come to the point where they’re starting to do that, and that’s triggered the increased activity in first-time homebuying in the last few months.”
Millennials are also relatively financially secure in the current economic crisis, which boosts their buying ability, too.
Changes in rental preferences
Of course, not all millennials or other prospective first-time homebuyers can afford the upfront costs of such a big purchase, but Nothaft said, their new needs and wants are being reflected in rental trends, too.
“What we’re beginning to see is a shift from renting in apartment buildings to renting in single-family homes,” he said. “They can afford the monthly cash flow, and they’ll trade up to a single-family rental instead of a high-rise apartment building, and it’s because of this stuff with the pandemic.”
Even those who can’t afford to buy a house are finding ways to get access to the amenities single-family homes offer.
“One of the lasting effects that we may very well see from the pandemic is not necessarily the school room in the home, but it is the office in the home,” Nothaft said. “That will increase that demand for space, and typically you’re able to get more space in a single-family home than you can in a high-rise structure.”
Mortgage rates are expected to rise slowly over the next few years, which will continue to spur on a competitive housing market and encourage more first-time buyers than ever.
Millennials are likely to make up a larger share of those buyers, and the desire for more space will affect rental trends as well.
If you’re looking to purchase a home or refinance your mortgage, you’re likely to benefit from the trend of low interest rates. Sellers will benefit, too, as competition continues to boost property prices in most markets.