Mortgage rates may be at record lows, but they are poised to increase next year.
The current 30-year mortgage rate is at 2.7%, a 14th record low since March
Today’s mortgage rates are at a record low and they offer the very best deal of the year. Soon, that deal will vanish, and rates will rise, which will impact monthly payments and affordability. Many think the Federal Reserve is in charge of setting mortgage rates, but that is not true. Instead, they set the short term fed funds rate, currently at zero. This rate affects automobile loans, credit card rates, and small business loans, also known as “short term debt.” Long term debt, or 30-year fixed mortgages, are tied closer to long term bonds. Watching any movement in U.S. 10 Year Treasury bonds will indicate where mortgage rates are headed. Prior to this year, the 10-Year has never been below 1% (it is at 0.896% today). Similarly, prior to this year, mortgage rates have never been below 3% (they are at 2.7% today).
Bad economic news drives the 10-Year down and good economic news pushes it higher. COVID-19 and the economic recession due to the forced shutdown of the economy drove the 10-Year below 1% for the first time ever. There is a “spread” between the 10-Year bond and the 30-year mortgage rate that is fairly uniform over time. Capacity constraints and risk aversion prevented mortgage rates from immediately plunging below 3%, but they eventually got there in July.
The United States economy has been on the mend. Retail sales have rebounded. New home sales and residential resales have rebounded. Consumers are consuming again. Manufacturing has returned. And, there is light at the end of the tunnel, the Coronavirus Pfizer vaccine has been approved by the FDA and distribution to all of the states started on Sunday. A second vaccine, Moderna, is scheduled to be approved at the end of the week as well. By mid-2021, the bulk of the U.S. population will be inoculated from the virus. The economy will undoubtedly improve. With all this good news, the 10-Year has improved from 0.645% in September to 0.896% today. In 2021, over the coming months, there will be more good news to follow: a congressional relief package, more positive vaccine news, positive jobs reports, and positive economic reports. It will not be long before the 10-Year pops above 1%. As a result, expect mortgage rates to increase from today’s exceptional 2.7% level to 3.5% by the end of 2021.
In looking at rising rates impact on affordability, today’s unbelievably low rate offers buyers the power to buy a much larger home. A buyer with a 20% down payment that desires a monthly principal and interest rate payment of $3,000 is able to purchase a $925,000 home. Rising rates erode home affordability. With mortgage rates projected to rise to 3.5% by the end of 2021, that $3,000 desired payment yields an $835,000 home. That is a jaw dropping $90,000 less, a significant difference in a buyer’s home search.
Today’s 2.7% mortgage rate is a Black Friday, Cyber Monday, or Amazon Prime Day type of deal. It is a record low that is motivating buyers to storm the housing market. As the United States economy improves over the course of the year, mortgage rates will climb. With today’s powerful housing demand in Orange County, the strongest December demand reading since 2011, combined with today’s record low active inventory level, the lowest reading since tracking began in 2004, home values will appreciate in 2021. With rising rates and rising home values, the time for buyers to act is right now. Lock it in!
The current active inventory continued to plunge, shedding another 9% in the past two weeks.
The active listing inventory shed 317 homes in the past two-weeks, down an astounding 9%, and now sits at 3,152, its lowest level since tracking began in 2004. Pass the eggnog, wrap those presents, grab a candy cane, the Holiday Market is here, which brings large drops in both supply and demand. This year is no different. Expect the active inventory to continue to drop until ringing in a New Year. It will drop below 3,000 available homes, limited the available homes to purchase to unbelievable low levels, making it extremely difficult for buyers to secure a home. The inventory will not start to rise again until this coming January.
Even with the active inventory dropping to all-time lows since tracking began, there are MORE homes coming on the market right now compared to last year. COVID-19 suppressed homeowners from entering the fray earlier in the year, but that ended in Orange County in July. Now there are more homes coming on the market year over year. In November, there were 15% more homes that came on the market compared to 2019, an additional 317 FOR-SALE signs. Even with the recent surge in COVID-19 cases, homeowners are still being lured into selling their homes in Orange County.
Demand dropped by 3% in the past two weeks.
Demand, the number of new pending sales over the prior month, decreased from 2,621 to 2,549 in the past couple of weeks, shedding 72 pending sales, down 3%. It is the lowest demand reading since June, but the strongest December since 2011. Demand is not dropping as fast as it typically does during the Holiday Market. Within the past 5-years, on average demand dropped by 9% during the same two-week period. The low mortgage rates are prompting buyers to remain active despite the holidays and the fact that the supply is so anemic. Demand will continue to drop through year’s end.
In the past two-weeks the Expected Market Time decreased from 40 to 37 days, its lowest level of the year and a HotSeller’s Market (less than 60 days), where sellers get to call the shots during the negotiating process and home values are on the rise. Last year the Expected Market Time was at 70 days, much slower than today.
The luxury market dramatically improved with a sharp drop in the inventory and a surge in demand.
In the past two-weeks, the luxury inventory for homes above $1.25 million plunged by 117 homes, or 8%, and now sits at 1,318. At the same time, luxury demand increased by 466 to 502 pending sales, up 36, or 8%. Luxury has been the great surprise in 2020, and December is no different as it marches to the beat of its own drum. Typically, both supply and demand drop during the Holiday Market, but not this year. With a giant drop in the supply coupled with a sharp increase in demand, the overall Expected Market Time for luxury homes priced above $1.25 million decreased from 92 to 79 days in the past couple of weeks. Luxury is at its strongest point of the year, tying the level reached in July.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time decreased from 47 to 36 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 63 to 53 days. For homes priced between $2 million and $4 million, the Expected Market Time decreased from 126 to 119 days. For homes priced above $4 million, the Expected Market Time decreased from 322 to 248 days. At 248 days, a seller would be looking at placing their home into escrow around August 2021.