Today’s low mortgage rates are helping home buyers, but they might also lead to future inventory … [+]
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In a coronavirus-created environment of severe inventory shortages and rising prices, home shoppers do have one advantage in the form of extremely low interest rates. Yet, while propitious today, the latter bear repercussions for the U.S. housing market for years to come.
According to mortgage buyer Freddie Mac, the interest rate on a 30-year home loan was 3.24% on Thursday, about a whole percentage point lower than a year ago. Even before the Covid-19 pandemic, rates have been sliding in response to market forces and Federal Reserve policies, previously aimed at keeping the U.S. economy chugging during its longest expansionary period.
And, mortgage rates could slide even further down. Home listing site Realtor.com anticipates them to drop below 3% later this year. Earlier this month, United Wholesale Mortgage announced a loan program with a 2.5% rate for both purchase mortgages and refinances.
Some home buyers, especially those signing contracts on new builds, are already seeing loan rates below 3% with the help of sale incentives from homebuilders and developers, says Ali Wolf, chief economist at real estate data and advisory firm Meyers Research.
Ruben Gonzalez, chief economist at real estate brokerage Keller Williams, says, “From a consumer perspective, it’s good. For the subsets of the population who are able to maintain their income right now and are feeling confident about their future economic perspectives, [low interest rates] are creating an opportunity to get into the market.”
The ultra-low interest rates also help maintain price stability in the housing market, averting the kind of free fall that occurred during the Great Recession, says Gonzalez.
Even if home prices have maintained their upward trajectory amid the coronavirus, the puny interest rates are spelling a long-term benefit for home shoppers, especially first-time millennial buyers, who are able to purchase today.
“Low rates can literally turn back time,” says Wolf. “If you look at what the monthly payments would be today versus a few years ago, in some markets, the rates – as low as they are right now – [are bringing] that monthly payment back to 2015 or 2016 levels.”
The negative side effects of low mortgage rates
But this generates a potential drawback that may manifest itself once interest rates reverse course and start to climb back up again. When this happens, homeowners who had bought their residences in the current low-rate environment might not have much of an incentive to sell.
“If they move, home prices have probably gone up over the same time too and now their monthly payment is going to be more expensive,” Wolf says. “You’re going to then see a lot less mobility in the housing market.”
Less mobility would likely translate into sustained home shortages and affordability challenges, unless builders meet demand, which they have struggled to achieve for years now. Still, today’s low rates are benefiting buyers and, thus, promoting confidence in the housing market, a sentiment that typically spurs homebuilders’ operations.
There is another, more immediate adverse impact of low interest rates, especially for the average American home buyer. That is the incentivization of institutional investors, who in the last recession purchased single-family abodes in bulk to turn them into rentals.
Amid the coronavirus pandemic, single-family rental behemoths like American Homes 4 Rent and Amherst Holdings have inked deals – with JP Morgan Chase JPM and Koch Industries KVHI , respectively – that are pouring millions of dollars into their businesses. While large-scale investors often purchase homes in cash or build their own rental communities, some might finance their acquisitions in order to benefit from the historically low mortgage rates contrasted with rent rates that continue to appreciate.
“We already know supply is tight, and now you throw more investors into the picture – that’s going to keep inventory even lower,” Wolf says.