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The Fed’s Policy Change May Keep Rates Lower for Longer than Expected

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The Federal Reserve is changing its policy with regards to how it quickly it responds to inflation.  Historically, once inflation reached increased by about 2%, the Feds would raise interest rates.  Now, in an effort to support the economy, the central bank is pushing the threshold of inflation beyond the 2% target.

This change, according to an article published by CNBC.com, is a way for the Fed to encourage spending by allowing Americans to continue to borrow money at low rates.  According to professor of Finance and Economics, Laura Veldkamp, “This is meant as a stimulus, as a way of getting people to spend more.”   

By allowing rates to stay lower for a longer period of time, many lenders can pass the low rates on to their consumers.  For example, credit card rates have fallen to 16% on average, personal loans are reporting rates as low as 12.07% and HELOCs have rates below 5%.

As reported in the article, the downside to the change in policy is the effect increased inflation will have on long term bond prices.  The chief financial advisor for Bank Rate, Greg McBride states that these longer term bonds will be more prone to large price declines.  Yet, ““With low inflation the Fed’s focus now, that’s a concern for another day…”

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Amid the Pandemic, Mortgage Rates Set Records

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As residents of the U.S. sort through the many updates on the progress of containing the outbreak of COVID-19 cases, anxiously await news for a vaccine and patiently waiting to find out when life will return to some sense of normal, the U.S. economy fluctuates with the positive and not so encouraging updates.  Most recently, the news of the economic uncertainty due to the pandemic has impacted mortgage rates, yet again.

According to an article published by CNN, mortgage rates recently dropped below 3% for a 30 year mortgage.  This drop marked a 50 year record low for mortgage rates.  As a result, many home buyers, and those that were sitting on the fence debating purchasing a home, have decided that there’s no time like the present to make the move.  The demand for homes has increased, especially since the lower rates has allowed more prospective home buyers to afford homes that might have been just beyond their reach just a few short weeks ago.

However, just as the daily news cycle is filled with promise coupled with concerning medical and economic updates, the good news about rates is wrapped with a warning of what may be on the horizon.  Since the rise in coronavirus cases seems to be surging again, more job layoffs and even job losses could be inevitable.  Obviously, as unemployment rises, home buyers can be hesitant, if not unable, to purchase a home.

As the article quotes Danielle Hale, chief economist for Realtor.com, things could look up soon, “On the upside, signs of progress toward a coronavirus vaccine give hope that there’s a path to a new normal where health concerns don’t dominate decision making.”  We all hope that comes sooner rather than later.

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Is the Real Estate Market on Track for a Comeback?

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At first glance, reported home sale prices that only increased .5% year over year in May 2020 might appear to be disappointing news for real estate professionals and their customers.  However, according to an article published by Redfin.com, the slight gain was mostly impacted by the small number of homes selling in expensive U.S. cities.  Further, Redfin’s lead economist Taylor Marr sees some positive news based on other spring sales numbers, stating, “Although the housing market was still mostly stalled in May, it’s worth noting that homes under contract to be sold jumped 33% between April and May after two consecutive months of decline.  This is a key leading indicator for home sales in June and July. New listings of homes for sale have also likely passed their bottom…”

Nevertheless, the market still has a ways to go before it is back on track to performance during the pre-COVID-19 shut down.  Although all large metro areas in the U.S. have seen significant declines in home sales as compared to last spring, areas such as Michigan and Pennsylvania saw decreases of over 60%.  These are examples of a couple of states that were the most restrictive for staying at home during the pandemic’s initial outbreak.

Yet, good news appears to be on the horizon.  New listings, according to the article, increased almost 36% from April.  Additionally, days on the market and number of homes selling above list price remain positive, signs of a strong buyers’ market continued throughout the state wide shut downs, due to continued low inventory of homes and low mortgage rates.   

Read the entire article for more details and highlights across the nation’s metro areas.

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Will the Supply of Homes Catch Up with Increasing Demand?

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The global pandemic brought the U.S. real estate market to a screeching halt during the spring months of March and April.  With stay at home orders in place and uncertainty among Americans about the best ways to stay safe from the spread of COVID-19, many sellers decide to hold off or cancel listing their home for sale.  However, May has brought loosened restrictions for business and social interactions, leaving Americans feeling that it may be safer to resume some activities that had been put on the back-burner.  Specifically, Americans that want to purchase a new home are beginning to ramp up their search and even make offers to purchase homes.

However, the fact remains that the number of homeowners listing their homes had been steadily declining. And despite a small up-tick, the supply for homes continues to be low, down by almost 30% annually as of the first week of May.  Nevertheless, there is a significant number of potential home buyers that are looking to take advantage of low mortgage rates.  Not to mention, many Americans have spent more time in their current homes during stay at home orders, helping them realize they need a larger home, perhaps a home office or more outdoor space.  These factors have helped drive up the demand for homes in many parts of the U.S.

CNBC.com published an article by Diana Olick that describes a major uptick in bidding wars for homes as a result of the mismatched supply and demand.  In fact, the article says, “More than 41% of homes faced a bidding war in the four weeks ending May 10, according to Redfin.”  Realtors in areas such as Boston, San Francisco and Fort Worth, Texas, indicate that more than 60% of purchase offers are met with competition from other buyers.

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Positive Trends in Home Purchases are Encouraging to Real Estate Professionals

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Across the country, Americans have been sheltering in place and practicing social distancing in an effort to help slow the spread of COVID-19.  Many normal activities have been modified or even put on hold.  With the slow reopening of the country, many potential home buyers have emerged and seem to be ready to take the leap into home ownership.

Mortgage applications, according to an article published by CNBC.com, rose for the fourth consecutive week, up by an encouraging 11 percent.  Despite the fact that, overall, mortgage applications are still about 10 percent lower than they were this time in 2019, it appears the gap is closing.

The article, written by Ty Wright, quotes MBA economist Joel Kan, ‘”We expect this positive purchase trend to continue — at varying rates across the country — as states gradually loosen social distancing measures, and some of the pent-up demand for housing returns in what is typically the final weeks of the spring home buying season.”’

Despite the fact that refinance applications have been on the decline, after a very busy early spring, it appears home purchases may fill that gap. In fact, according to the article, mortgage applications are up pretty significantly, “New York led the purchase demand with a 14% jump in those applications. Illinois, Florida, Georgia, California and North Carolina also had double-digit increases last week.” It seems buyers, anxious to return to some normal life activities and move forward with purchasing their first or next home, are encouraged by mortgage rates that are still below 3.5% for a 30 year period.

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How Will Housing Prices Be Affected by COVID-19?

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It may not come as a surprise to read that the housing market has been affected by the COVID-19, but many home owners and potential buyers may be curious what experts think the future holds for this year’s real estate market.

As stay at home restrictions coupled with fears of the spread of the pandemic began in March, pending sales on homes took a direct hit.  In fact, they fell 20.8% in comparison to February.  According to an article published by CNBC.com, the housing market had already been impacted by a shortage of homes for sale.  As the news and impact of COVID-19 settled in, the shortage became more drastic as owners decided not to list and some homes were actually de-listed. 

However, experts believe, according to this piece written by Justin Sullivan, that this impact should turn around.  Quoting Lawrence Yun, NAR’s chief economist, “The housing market is temporarily grappling with the coronavirus-induced shutdown, which pulled down new listings and new contracts. As consumers become more accustomed to social distancing protocols, and with the economy slowly and safely reopening, listings and buying activity will resume, especially given the record low mortgage rates.”

After 5 weeks of decreasing mortgage applications, there was recently a double digit rise in mortgage applications.  And, although the home sales may be low for the year, home prices should not be impacted.  The fact that there is still a shortage of homes and the mortgage rates are low enough to attract buyers, prices could see some significant increases.

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Will Coronavirus Affect the Real Estate Market?

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News of the coronavirus is a constant in all mainstream media lately.  Its impact is far reaching, not only as Americans and citizens of the world take precautions to stay healthy, but economically and on a global level.  As a result, last Tuesday, the Federal Reserve made a decision to make a rate cut, in anticipation of recession concerns.

According to a Realtor Magazine article published last week, the rate cut was significant, the largest one time cut since 2008.  The impact of this decision could, in time, affect the real estate markets.  According to Lawrence Yun, chief economist at the National Association of Realtors, “The real estate sector will hold up very well because of the rate cut. Hesitant home buyers will be enticed to take advantage of low interest rates. Commercial property prices will rise due to higher returns that can be had from the bond market after adjusting for risks.”

Some experts believe that rates which are now averaging 3.45% could drop even lower before the economy rebounds from the effects of coronavirus.  Mortgage rates low as 3% have not been ruled out by Rick Sharga, president and CEO or CJ Patrick Company.

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Photo Credit Sergio Santos

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Do Buyers Really Need a 20% Down Payment To Buy a House?

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Many homeowners may remember setting aside money each month in order to save the 20% down payment necessary to purchase a home, especially to avoid having to pay PMI (Private Mortgage Insurance.)  However, more and more first time home buyers are deciding to purchase a home before they have saved the 20% down payment.

According to an article published by Business Insider, reporter Liz Knueven states, “For many young Americans struggling with student-loan payments, higher rent costs, and relatively stagnant salaries, saving a fifth of a home’s value to get a mortgage simply isn’t on the radar.” 

Real estate professionals aren’t against the idea either.  For first time home buyers, especially near large cities where home values are steep, saving the 20% down payment can take many years.  Instead of saving the cash, buyers can purchase a home and begin building equity, even while paying the PMI of .3%-1.2%.  As the home builds in value, homeowners may be able to drop the PMI, once the mortgage value reaches 78%-80%.

Despite the decrease in home buyers waiting to have the 20% down payment, there are still advantages to a larger down payment if its possible.  It can help edge out competition in a multiple offer situation on a home, can help secure a lower interest rate and save the cost of the PMI each month. 

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The 2019 Real Estate Market Saw Growth from 2018

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Despite the fact that, according to survey data released by The Mortgage Bankers Association (MBA), December 2019 home sale activity lagged in comparison to November 2019, over all 2019 saw growth when compared to 2018.

New single family home sales only increased .1 percent from November to December of 2019, but without the seasonally-rate, numbers actually came in with about 3000 less new home sales in December compared to November. Yet, average loan sized increased by close to $10,000 for December 2019. A recap of the entire year, however, shows an increase of new mortgage applications almost 40 percent higher than 2018.

According to an article published by NationalMortgageProfessional.com, Joel Kan, MBA’s associate vice president of economic and industry forecasting  is quoted, “The housing market is seeing signs of a more significant recovery in new residential construction, which is a promising sign for prospective homebuyers. Even though supply continues to lag, we expect to see another year of gradual growth in new home sales, supported by rising household formation and the healthy job market.”

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Photo Credit: Gerd Altmann

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Home Mortgage Applications Soar into the New Year

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2020 has been good to the home mortgage industry so far.  According to an article published last week by CNBC.com, “Total mortgage application volume surged 30.2% last week from the previous week”.  Mortgage companies not only saw an influx of refinance applications, but also an unseasonably high number of home purchase applications.

Interest rates dropped to the lowest level since fall of 2019 and, as a result, refinance applications surged.  In fact, according to the article written by Diana Olick, “Those applications jumped 43% for the week and were 109% higher than a year ago. The refinance share of mortgage activity increased to 62.9% of total applications from 58.9% the previous week.”

However, home purchase applications pulled in some impressive numbers, especially considering the housing market typically doesn’t pick up until February.  The volume of home purchase applications came in at the highest tally since October of 2009. 

Unfortunately, this high demand for homes is met with a very low supply of homes. With a continued supply and demand mismatch, prices could soar and leave some prospective home buyers priced out of the market.

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Photo Credit: Gerd Altmann

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