Everything You Need to Know About Prices, Supply and Mortgage Rates
With spring homebuying season disrupted by the coronavirus, would-be house hunters may be wondering if this fall will be a good time to buy.
The housing market is typically slow after August, as kids settle in for the school year and the weather starts to cool in much of the country. But, this year, the answer to that question—like so many posed since the start of the pandemic—is maybe, it depends.
To help you make the best decision for you, we’ve outlined a few expert predictions, as well as four pros and three cons of purchasing a home this fall.
Pro: Virtual school removes a common barrier to moving
Parents are not usually inclined to buy a home if it means yanking their kids out of school and moving to a new school district. Most homebuying happens in the spring, in part, so families can move over the summer. But some experts predict that may not be as big of a concern this year with many schools staying online only. Public school districts in many cities, including Los Angeles, Washington, D.C., and Philadelphia, have already announced they’ll be starting the academic year with all virtual classes. Buying a home and moving this fall may be “less disruptive” for kids who are already learning remotely, says George Ratiu, Realtor.com’s senior economist. In other words, parents may be able to house hunt with less time pressure.
Pro: You can nab a great mortgage rate
Earlier this month average mortgage rates dropped to 2.88%, the lowest ever for a 30-year home loan. Rates should remain low through the end of the year, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance. The policy makers at the Federal Reserve have indicated they expect to keep the short-term federal funds rate at its current range of 0% to 0.25% through 2022, pushing mortgage rates in the same direction. Cecala predicts 30-year rates could even drop as low as 2.5% this fall. “The normal mortgage rate barometers—the 10-year Treasury rate and the Fed rate—already are at levels to support mortgage rates below 2.5%,” Cecala says. “The only reason mortgage rates are above that level now is that lenders have not felt the need to be very competitive and offer rates that low. So, it won’t take much to get to 2.5% or below.”
Because lower mortgage rates mean lower mortgage payments, your money goes farther when interest rates are low.
Pro: New construction has picked up
Buyers who are in the market for a brand new home will have more options this fall. “I think we’ll see builders playing catch-up to compensate for the lockdown period earlier this year,” Ratiu says. Already, builder confidence in the market for newly-built single-family homes jumped 14 points in July, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) report. Moreover, single-family housing starts and permits posted double-digit growth in June, the NAHB reports. Therefore, buyers will have significantly more new homes to choose from this fall.
Pro: Homes prices could go down…
Buyer demand drove up asking prices 8.5% in July from a year ago, Realtor.com reports, pushing the national average median list price to a record-high $349,000. Of the nation’s 50 largest metros, 48 saw year-over-year gains in median listing prices last month, with suburbs surrounding big cities driving much of the gain
However, Zillow forecasts a 2% to 3% drop in home prices through the end of 2020 from pre-coronavirus levels if buyers step back from making big home purchases and social distancing again restricts home appraisers and inspectors from offering their services. If that happens, more buyers will be able to purchase homes.
The caveat? Some cities have seen rapid growth recently: The median list price in Pittsburgh, Pa. rose 25% last month; the median list price in Cincinnati, Ohio jumped 18.5%; and in Los Angeles the median list price rose 24.3%. As a result, some buyers have already been priced out of their local market.
Con: …or home prices could go up even more
Recent forecasts by Zillow and data analytics firm CoreLogic predict that national home prices will decrease slightly in the coming months, but if mortgage rates stay low and continue motivating buyers to enter the market, home prices may climb through the end of the year.
Jaime Sneddon, a broker at William Pitt Sotheby’s International Realty in New Canaan, Conn, says he thinks home prices in his market will go up—without pricing buyers out of the market. “There’s a lot of room for home prices to grow before they start to look unaffordable,” he says.
Con: Supply will be limited
The national total supply of homes for sale in July declined 32.6% year-over-year, according to Realtor.com. That amounted to a loss of 440,000 listings compared to July of last year. “Inventory has been tight because sellers were reluctant to sell during the pandemic, given the quarantines and steep drop in [foot] traffic,” says Ratiu.
First-time buyers, especially, may face a severe inventory shortage. “This year’s pandemic accelerated the shortage of entry-level homes, as buyers—eager to leverage historically low mortgage rates—came back from the quarantine looking for a solution to the new normal of social distancing and remote work.”
Con: Competition will be fierce
“It’s firmly a seller’s market, and there’s no indication why it wouldn’t continue to be a seller’s market this fall,” says Owen Berkowitz, a co-principal of the Berkowitz Marrone Team with Douglas Elliman in Scarsdale, NY. Because inventory is low, Berkowitz says he’s seeing bidding wars on most homes. Buyers will have to move fast—according to brokerage Redfin, 46% percent of homes that went under contract during the four-week period ending August 2 found a buyer within two weeks of their market debut.
Sneddon also expects sellers to retain negotiating power this fall—meaning buyers may have to bid above list price and may end up making offers on multiple properties.
To compete, purchasers will have to obtain a mortgage pre-approval letter before they make an offer. Buyers should get quotes from three lenders before selecting their mortgage provider to nab the best mortgage rate and loan terms for them.
Mortgage rates keep falling, yet many homeowners are still sitting on the sidelines waiting to refinance.
Rates have been dropping steadily since the coronavirus crisis began, spurring a refinancing boom. According to mortgage data firm Black Knight, servicers originated more than 2.3 million refinance loans in the second quarter of 2020, the highest volume in nearly 17 years. With rates below 3%, a recent Black Knight study found that 19.3 million homeowners stand to knock at least 0.75% off their current mortgage rate by refinancing.
Homeowners have held off on refinancing for several reasons, says Kevin Hall, who oversees home lending at Navy Federal Credit Union. “Rates have been low for a while now, so we could be seeing a situation where someone refinanced a couple years ago, and they feel like they’re in a decent place in terms of rates, so they just don’t think they need to refinance,” he says.
Others may be waiting because they’re trying to time the mortgage market, which Heather McRae, a senior loan officer at Chicago Financial Services, says is a big mistake. “Interest rates will be impacted by the results of the election, a covid vaccine, and anything else you can imagine,” says McRae. “Instead of trying to time a refinance, it is best to consider refinance options that improve what your current mortgage situation is.” McRae has also seen clients who are hesitant to refinance because they fear they’re going to lose their job, which would cause their refinance to fall through.
The decision to refinance (or not), Hall says, hinges on several factors, such as what a homeowner’s goal is for trading in their mortgage and what shape their finances are in. Here are five questions to determine whether right now is the right time for you to refinance your home loan.
How long do I plan to own my home?
Jack Guttentag, author of The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls, says one factor homeowners should always consider before refinancing is how much longer they plan to stay in their home. “If your time horizon is very short, you may not have enough time to recoup your closing costs,” he says.
These days the general guideline is a 0.5 percentage point drop in rates or more makes it worth your while to refinance, but there are a couple caveats. “My rule of thumb is if you can’t break even on your closing fees in four years or less, it’s probably not a good idea to refinance, even if you plan to stay in the home longer, because your money could be growing faster in other investments,” says Tammi Lindley, a loan officer at Mortgage Express in Portland, Oregon.
Moreover, refi closing costs usually run 3% to 6% of your loan amount. So on a $300,000 mortgage, you’d have to fork over between $9,000 and $18,000. Many lenders, though, offer what’s called a no-cost refinance, where they bake the closing fees into the loan in the form of a higher interest rate. What that means is: “If the rate you can get on a no-cost refi is below the rate on your current mortgage, then there’s no reason not to [refinance],” Guttentag says.
How’s my credit score?
Typically borrowers need at least a 740 credit score to qualify for the best mortgage rates, which is why it’s important to check your credit score before shopping for a new loan.
If your credit score has taken a hit during this economic crisis—say, because you got laid off and missed a few credit card payments—you may want to take some time to improve your credit before applying for a refinance. Paying down debt and asking for credit line increases are two ways to boost your credit score.
Am I in a hurry?
Patience is a requirement for refinancers in today’s mortgage market. Lenders are dealing with high loan demand and staffing shortages. As a result, refis are taking longer to process. Hall says turn times can be as long as 120 days depending on the lender’s workload. (Normally, refis are processed in 45 to 60 days.)
Another reason refinancing is taking a while: “Typically lenders prioritize purchases over refinances, because buyers are on a deadline,” says McRae. Also, because home appraisers are swamped, many refinancers are waiting in a long line to have their appraisal performed. (Pro tip: “Ask your loan officer upfront what their average escrow period is,” Lindley suggests.)
In addition, make sure you factor in time to shop around. You’ll want to get quotes from three or four lenders, McRae recommends, since rates can vary depending on a lender’s pricing algorithm. For example: in San Francisco, taking the first mortgage offer you receive without shopping around could cost you more than $66,000 in interest over the life of your loan, a recent LendingTree study found.
Do I have my paperwork in order?
If it’s been more than a decade since you last refinanced or purchased a home, be prepared to provide significantly more paperwork when you apply for your new loan. “Even if you have an 800 credit score and a boatload of money, the underwriting requirements are incredibly strict right now,” McRae says.
Even though technologies such as e-signatures have helped streamline the application process, many lenders are requiring borrowers to provide documents for employment verification several times throughout the refinancing process, since a lot of people are still losing jobs. “It’s not ideal, but that’s the situation we’re in during the pandemic,” McRae says.