Housing Activity Expected to Remain Strong in 2021

As the market reacts to a new administration in Washington and COVID-19 driven economic uncertainty, mortgage rates continued to decrease or remain flat. As housing prices increase at the fastest rate we’ve seen in years, competition to buy is strong given the low inventory that exists across the country. The fact that there are not enough homes to meet demand is going to be an ongoing issue for the foreseeable future.

Experts continue to predict that 2021 will bring about strong economic growth, supported by low mortgage rates, which in turn will bolster existing-home sales. At the end of January, the Federal Open Market Committee left future economic policies virtually unchanged, indicating that short-term mortgage rates will stay low for years to come.

We’ve collected some more informative data below to reflect the start of 2021:

Mortgage Rates

Mortgage rates remained flat this week and near record lows, signifying an economy that continues to struggle. This rate environment is advantageous for those who are looking to refinance in order to strengthen their financial position. While many have already refinanced, the evidence suggests that upper income homeowners have taken advantage of the opportunity more so than lower income homeowners who could stand to benefit the most by lowering their monthly mortgage payment.

Existing and Pending Home Sales

Existing-home sales rose in December, with home sales in 2020 reaching their highest level since 2006, according to the National Association of Realtors®. Activity in the major regions was mixed on a month-over-month basis, but each of the four areas recorded double-digit year-over-year growth in December.

"Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic," said Lawrence Yun, NAR's chief economist. "What's even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market." Yun predicts a continuation of the strong activity that's currently taking place in the housing market and in the overall economy." Although mortgage rates are projected to increase, they will continue to hover near record lows at around 3%," Yun said. "Moreover, expect economic conditions to improve with additional stimulus forthcoming and vaccine distribution already underway."

• The median existing home price2 for all housing types in December was $309,800, up 12.9% from December 2019 ($274,500), as prices increased in every region. December's national price increase marks 106 straight months of year-over-year gains.

• Total housing inventory at the end of December totaled 1.07 million units, down 16.4% from November and down 23% from one year ago (1.39 million).

• Properties typically remained on the market for 21 days in December, seasonally even with November and down from 41 days in December 2019. Seventy percent of the homes sold in December 2020 were on the market for less than a month.

• First-time buyers were responsible for 31% of sales in December, unchanged from the same time in 2019, but down from 32% in November 2020.

• Individual investors or second-home buyers purchased 14% of homes in December.

• Distressed sales (foreclosures and short sales) represented less than 1% of sales in December.

Despite dropping slightly in the last month of 2020, the latest pending home sales registered as the highest ever recorded in the month of December, according to the National Association of Realtors®. The decrease marks the fourth consecutive month of month-over-month declines. While contract transitions fell in one of the four major U.S. regions, activity climbed or remained flat in the three other areas. Compared to a year ago, all four regions witnessed double-digit gains in pending home sales transactions.

Pending home sales contracts have dipped during recent months, but I would attribute that to having too few homes for sale," said Lawrence Yun, NAR's chief economist. "There is a high demand for housing and a great number of would-be buyers, and therefore sales should rise with more new listings."

Mortgage Applications and Forbearance

Mortgage applications increased 8.1 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending January 29, 2021. The Refinance Index increased 11 percent from the previous week and was 59 percent higher than the same week one year ago.

The drop in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates.

• After increasing for three consecutive weeks, the 30-year fixed mortgage rate dropped 3 basis points to 2.92 percent.

• Purchase activity was unchanged last week, with a 1 percent increase in conventional applications offset by a 3 percent decline in government applications.

• The refinance share of mortgage activity increased to 71.4 percent of total applications from 70.7 percent the previous week.

Average purchase loan amounts in early 2021 continue to rise across all loan types, driven by a strong pace of home sales, tight housing inventory and high home-price growth. Conventional, FHA and VA purchase loan sizes all set new survey records last week."

The MBA’s latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance remained unchanged relative to the prior week at 5.38%. According to MBA's estimate, 2.7 million homeowners are in forbearance plans.

The Economy Speeds Up and Housing Downshifts

The U.S. economy is expected to grow 5.3 percent in 2021, a substantial improvement from the currently projected 2.7 percent contraction in 2020, with a strong pick-up in growth projected to commence over the spring months, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.

The latest forecast of full-year 2021 real GDP growth is an upgrade of 0.8 percentage points from the previous month’s forecast, reflecting the ESR Group’s view that the expansion of COVID-19 vaccination efforts and the approach of warmer weather will likely reverse the economic weakness experienced at the end of 2020. Immediate risks to the forecast center around the path of the pandemic and progress on vaccination distribution.

Housing activity is expected to remain strong in 2021, but sector growth will likely decelerate from the torrid pace set in the second half of 2020. While the ESR Group expects home sales to rise 3.8 percent in 2021, the monthly pace is likely to slow through much of the year. Home price appreciation is also expected to slow along a similar timeline. Purchase mortgage originations are expected to rise in 2021 to $1.8 trillion from 2020’s projected $1.6 trillion, while refinance origination activity is forecast at $2.2 trillion in 2021, down from the projected all-time high of $2.8 trillion in 2020. With mortgage rates near historic lows, the ESR Group estimates that 67 percent of outstanding mortgages have at least a half-percentage point incentive to refinance.

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