The Coronavirus pandemic forced businesses across the country to close for weeks and months; the economy started to crash. Corresponding to that crash, mortgage and interest rates began to drop to all-time lows.
Americans responded by submitting mortgage refinance applications in droves. City-dwellers rushed to buy new or second homes outside of metropolitan areas, where population density and shared amenities fueled the contagious pandemic.
Few could predict that interest rates would dip so low and that so many would be interested in buying a home during a global pandemic. Now that we’re more than halfway through 2020, what does the rest of the year have in store for mortgage rates?
“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” Lawrence Yun, the National Association of Realtor’s (NAR) chief economist, said on the company’s website. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”
What Happened The First Half Of 2020 With Mortgage Loans?
Before we look ahead, it’s essential to look back on how we got here. Mortgage interest rates dropped to historic lows since the pandemic hit the United States.
At first, it was hard for Americans to get a loan because banks were overwhelmed transitioning to online-only and adjusting to social distancing measures. Then, an influx of refinancing applications — the most in a decade — were submitted, which forced banks to inflate mortgage rates artificially.
Banks were also hesitant to give out loans to people who wanted to buy a home, in fear that home values would plummet paired with the concern more Americans would lose their jobs. The Federal Reserve slashed its interest rate to zero, a historic first.
“The Federal Reserve has responded to COVID-19 shock much faster than they responded to conditions during the Great Recession of 2008,” Katsiaryna Bardos, an associate professor of finance at Dolan School of Business, told The Mortgage Reports. “In addition to cutting the Federal Funds rate to near zero, the Fed dramatically expanded its asset purchase program. This included the purchase of billions of dollars of mortgage-backed securities.”
But now it’s almost more affordable and easier to get a low mortgage rate.
The average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 3.16 percent in June, down from 3.23 percent in May, compared to 3.94 percent in all of 2019, according to Freddie Mac.
“Plenty of buyers also appear ready to take advantage of record-low mortgage rates and the stability that comes with these locked-in monthly payments into future years,” Yun said on NAR’s website.
“The residential market has seen a swift rebound of activity as numerous states have begun to ease mandatory stay-at-home orders,” Yun said.
What’s Going To Happen To Mortgage Rates In The Second Half Of 2020?
Mortgage rates could remain low for the rest of 2020, but it’s hard to imagine them dropping much further. However, some think interest rates could drop even lower.
“If the primary market follows historical patterns, we would expect a further decline in mortgage rates of perhaps 0.5 percentage points. This would bring mortgage rates to a historic low,” Bill Emmons, an economist for the Federal Reserve Bank of St. Louis, wrote in a paper titled “Why Haven’t Mortgage Rates Fallen Further?“
Low rates are good news for Americans who want to buy a home or refinance.
Even if rates remain low, some banks are already making it harder to qualify, and this trend may continue to protect from a crash.
For example, JPMorgan Chase set a new credit score requirement of 700 and required a minimum 20 percent down payment for new loans, according to Reuters.
“Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers,” Amy Bonitatibus, chief marketing officer for JPMorgan Chase’s home lending business, told Reuters.
If the economy stays in a recession, it’s likely the mortgage rates will stay low to try and infuse some action into the real estate market.
“Lower rates will encourage financial activity. They may convince people who are on the fence to purchase or refinance now versus later,” Suzanne Hollander, a Florida International University real estate faculty, told The Mortgage Reports.
Another scenario may be banks raise the interest rates to keep a swarm of potential buyers from taking on more debt.
“Home prices rose during the lockdown and could rise even further due to heavy buyer competition and a significant shortage of supply,” Yun said.
With prices continuing to climb, and buyers in bidding wars, banks may want to raise the rates to ensure those taking out home loans can afford to pay them long term if another wave of the pandemic hits causing more economic uncertainty.
“The country is undergoing extraordinary times, and extraordinary movement is happening in the jobs data. The near 5 million job additions in a single month in June is off-the-chart the best ever,” Yun said. “However, much more needs to occur to overcome the 20 million job losses in April. Movement in the right direction is very encouraging, nevertheless. The housing market is clearly in a V-shaped recovery, and more home construction jobs need to be added.”