The current low mortgage rates are not going to last forever, according to expert economist Lawrence Yun. Due to steadily rising inflation and an increasingly stronger economy, expect to see these rates growing by as early as the end of 2021. By Spring 2022, the current 3% rate on a 30-year fixed mortgage is expected to rise to an average of 3.5%. What does this mean for the housing market? Higher rates result in higher home prices, which could potentially discourage buyers from making purchase decisions.
To avoid risk during the COVID-19 Pandemic, lenders have started to increase their standards significantly. As a result, borrowers looking to buy a home must have credit scores above 750 and should be able to place large down payments in order to receive the best rates. Borrowers looking for lending to purchase a second-home should also expect steeper rates. However, with the economy on the rise, these strict qualifications may soon ease.
As home prices increase, loan amounts must follow suit. The upsizing trend that started amidst the pandemic has also contributed to the large amounts being borrowed. The average mortgage taken out on a new home in March 2021 was $374,000, as compared to $332,000 in 2019. In addition to this increase, in February there was a 55% increase in borrowed amounts higher than $766,000 – the largest borrowing increase in any price range.
In response to strict qualifications from bank lending, non-bank lending has increased by offering lower costs and greater flexibility. In 2020, Quicken Loans issued the highest amount of loans for single-family homes, as compared to the top five U.S. banks, which only made up 21% of the total lending market share. However, instead of fighting the competition, banks such as Wells Fargo, Bank of America, and J. P. Morgan, have decided to watch the rivalry rise between digital non-bank lenders.
Many homeowners are responding to the news of rising mortgage rates by not selling in order to keep their current low rates. This “rate lock-in” will create challenges for buyers searching the market. With less homes being listed, supply will continue to decrease, fueling the current home price surge. However, while mortgage rates play a significant role in a homeowner’s decision to sell, potential sellers still consider other reasons to list their home, such as upsizing or moving to a new location.
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