Mortgage Rates in 2021: A Delicate Balance
In addition to changing the way people live, work, and purchase everything from groceries to computers, the pandemic has had a profound impact on the mortgage rates. Although it seems counterintuitive, record low mortgages have been a real bright spot in an otherwise arduous journey and economy throughout 2020. But the low mortgage rates have swung the pendulum to high buyer demand, and that is just one reason it is likely that mortgage rates will rise in 2021. Although no one has a crystal ball, there are several indicators that rates will creep up.
2020: Living on Easy Street
Despite the rocky terrain in nearly every other sector, home buying was a positive in 2020, with low interest rates helping many first-time buyers and allowing others to refinance their credit. According to Freddie Mac, the average 30-year fixed mortgage rate was 2.77% as of January 21, 2021. This capped off a year that saw rates fall to historic lows.
“The COVID-19 crisis was a deflationary event that sent bond yields and mortgage rates lower than they traditionally would have gone in a normal recession,” housing analyst Logan Mohtashami said.
The housing market was so prolific that it drove housing prices up, and this could contribute to the changing interest rates in 2021. The shifting demographics created by the pandemic created a shortage of houses in many markets, and with fewer houses for sale, the prices have climbed at the fastest pace in years in October 2020. Inflation, as well as the Federal Reserve’s interest in keeping interest rates close to zero until at least 2024, will also affect the rates.
2021: A Time for Change
Experts expect an increase in interest rates this year, but everything is predicated on what happens with the pandemic.
“The key thing for the early part of 2021 is going to be what happens with the pandemic. If the economy opens up, we may see interest rates start to rise a little bit,” said Len Kiefer, Deputy Chief Economist at Freddie Mac.
On the other hand, if the results of the COVID crisis continue to cause volatility, investors could extract money from the stock market and funnel it into the relative safety of Treasury bonds. If the interest on Treasury bonds sink, the mortgage rates typically follow.
Although no one can make a perfect prediction, most financial analysts think rates are bound to go up. “Mortgage rates could approach 3.4% by the end of the year,” Danielle Hale chief economist at Realtor.com said.
This will have a profound effect on buyers. “For a $300,000 30-year home loan, an increase of 1%, from 2.7% to 3.7%, would increase your monthly payment by $164. Over the life of the same loan, that extra 1% would cost you an additional $59,159 in interest,” according to the NextAdvisor mortgage calculator.
At this stage of the game, even a small increase can affect the bottom line exponentially for consumers.
Changing of the Guard
With the inauguration last week, whether rates will change is even more relevant. President Joe Biden has already made strides to fight COVID-19 vigorously, and the response to the pandemic will affect the economy and mortgage rates. If the virus is under control, this will help people financially.
“Once we get a vaccine distributed and better treatments, that last 10 million Americans who are still unemployed should be able to find work. That income, plus the fiscal aid and monetary aid should drive up inflation just a little bit higher, and demand should be higher, and growth should be back to normal… Slow and steady growth of the U.S. economy will be the primary driver of higher mortgage rates next year,” Mohtashami said.
In addition to his efforts with the pandemic, Biden is also making strides to help people struggling with unemployment and housing. Rick Sharga, executive vice president at RealtyTrac said, "Biden has called for more government investment in affordable housing, which could be funded in part by proceeds from fees attached to home sales backed by government agencies like Fannie Mae, Freddie Mac, and the FHA."
With the Democratic wins in Georgia, which tips the Congress to Democrat, both government spending and borrowing could increase, putting pressure on interest rates, as well.
In conclusion, there are several key questions in play that will affect the way mortgage rates swing in 2021. Joe Biden will have a lot to do with this. Although presidents don’t control interest rates or mortgage rates, Biden’s behavior might. His interest in affordable housing and getting people back to work will be a key to the economy in 2021. And because of the efforts he will expend to fight the virus, it should be more under control as the year progresses. Both facts could be catalysts in driving up mortgage rates.