[PULSE] What’s driving the lowest mortgage rates in history?

We are halfway through the year and mortgage rates have hit a low six times so far. With mortgage interest rates at the lowest they have ever been, the demand for housing is on the rise. 

Drivers of the lowest mortgage rates in history 

Several factors play into mortgage rates. Specifically, this year, the Federal Reserve has played a major role in keeping rates at their current low levels. They have stabilized the mortgage market by consistently buying mortgage-backed securities to ensure the housing market remains steady as it’s important that borrowing costs are cheap to avoid a housing crisis following a pandemic. 

In addition to the Fed buying MBS, we’re also seeing the natural supply and demand of a healthy mortgage market, which is a good sign. For example, jumbo rates have come down despite the Fed not buying mortgage backed securities in the jumbo space. 

shant
Shant Banosian
Guest Author

Typically, bad news leads to lower rates in the mortgage world. With recent news of coronavirus cases spiking in certain areas of the country and the potential of a second wave in the fall when schools reopen, money is going into a safer place – mortgage bonds and treasuries – and that keeps rates low. 

Low inventory + high demand = bidding wars 

Purchase applications are up 33% year over year (from June 2019 – June 2020). This is a huge increase. Part of this spike in applications is due to low activity in March and April when the pandemic first hit. This pushed a lot of the current demand into May and June.

Additionally, homeownership has become more important now than ever before. It’s where we live, work, go to school, workout and entertain. This has driven a big push out to the suburbs and many wanting to upgrade to a bigger space. A 900-square foot condo might have seemed like a good idea four months ago, but maybe not as practical now. Renters and owners alike are reevaluating what they want in a living space. 

According to Redfin, more than half of their offers were part of bidding wars for the second month in a row in June. Boston had the highest bidding war rate in June, of 72.4%, staying on top after 67.2% of offers had a bidding war in May. In June, the number of homes overall for sale in the U.S. was down 21.3% year over year, while the number of new listings was down 12%, leaving inventory at its lowest level since at least 2012.  

This will likely be the normal for some time so it’s important for buyers to be prepared. If a buyer knows their numbers – what their monthly payments will be, what down payment is needed, for a range of prices, they will not be overwhelmed by the competitive market. Prepared buyers will have success, win offers, and do well in an overbid situation.

In markets like Boston, the last two years a large percentage of homes have sold over asking. Now, just because something is going for over the asking price does not mean someone is overpaying. There are a lot of buyers that went over asking in these markets three, four and five years ago and their houses are worth a lot more money today than they were a couple of years ago. And those people don’t feel like they overpaid. 

The importance of new construction in a low inventory market 

Homebuilders saw the strongest June sales since the last housing boom. Sales of newly built homes jumped 55% annually in June. We’re seeing more new construction in the suburbs as the pandemic is pushing from the cities. We’re also seeing the desire for more customization in homes as people spend more time in them in the new normal. It was the largest annual gain since homebuilding began again following the epic housing crash a decade ago. It is also the highest pace since the height of the unprecedented housing boom in 2005. 

In short, we’re seeing a rise in interest of new construction as people want more space and more customization in their homes to fit their needs. 

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