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Record-low mortgage interest rates meant record-high origination volumes for many mortgage lenders across the country in 2020. Not even a surge in home price acceleration slowed origination activity.
But with those high volumes comes a new series of questions. How long will the interest rates stay this low? Will home prices level off this year? Are we headed for a repeat of 2008, which was preceded for a couple of years by a huge boom in originations only to be followed by an equally huge crash that resulted in record foreclosure activity and a period of several years known as the “Great Recession”? How different, or similar, is 2020’s origination explosion different from the one the industry experienced in 2006-08 before the crash?
Mortgage Banker magazine recently discussed accelerating house prices and the possibility of another bubble with Selma Hepp, Executive, Research & Insights and Deputy Chief Economist with CoreLogic.
The latest Case-Shiller data shows that house prices are accelerating at the fastest rate since June 2014. What does the recent surge in house prices mean for the market?
The recent surge in home prices reflects a convergence of several factors that even on their own could drive home prices higher but are now amplified in combination with each other. Hence, the home price acceleration picked up pace in recent months.
The surge also means that despite the economic challenges brought on by the pandemic, there is strong demand for home ownership, even more so than before the pandemic, one could argue. The surge also highlights the imbalance in the housing market from extended period of slow new construction and demographic tailwind which was accelerated by the pandemic.
Lastly, I also think it brings to light economic gains that were accumulated by the longest economic expansion which ended with the pandemic, and which were reflected in heightened demand for second/vacation homes across the country.
Will house prices level off at some point this year?
Home price growth is likely to take a breather in the coming months. According to CoreLogic HPI forecast, home price growth will slow to 2.5 percent by the latter part of next year but will still remain positive. Still, there are variations in expectations as some metro areas have been harder hit by the pandemic.
How long do you think interest rates will stay this low?
We do expect the mortgage rates to remain below 3 percent thru the end of 2021.
Are we headed for a housing bubble? Are there any similarities between now and 2008?
We are unlikely to be heading into a housing bubble though some of the housing markets that were negatively impacted by the pandemic and/or job losses related to local industries (such as Texas markets dependent on oil/mining) may see a slight home price correction over the next year.
There are very few similarities between now and 2008. Unlike 2008, current housing demand is driven by owner occupants and demographic trends that were under way prior to the pandemic, namely millennials reaching home buying age. Also, under-construction of new homes has contributed to lowest inventories of homes for sale going back to at least 1980. Current forsale inventory is at 40 percent of pre-Great Recession levels.
Lastly, underwriting conditions are much more demanding than was the case in 2008, with requirements further tightening since the onset of the pandemic. Most of the problematic loans prevalent in 2008 are not around anymore. Also, current homeowners have accumulated notable equity over the last decade which helps buffer them in case of financial distress. Thus, the foreclosure crisis that was experienced post 2008 is a very unlikely outcome of the current economic situation.
On the other hand, continual decline in mortgage rates to record low levels has helped spur demand and extend affordability options for home buyers with limited budgets. A concern remains that as home prices continue to rise, low mortgage rates will be eventually offset by higher prices thus reducing affordability further. Narrowing of potential pool of homebuyers will alleviate the pressure on home prices and bring down the rate of growth.