Looking Ahead: What Do Record Low Mortgage Rates Mean for the Housing Market?

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In the United States, the most popular loan product is the 30-year fixed loan. This mortgage package is the most common financing outlet that buyers use to purchase their new homes. That being said, changes in the mortgage market have immense repercussions on the housing market. 

Over the last year, mortgage rates have remained top of mind for anyone keeping their eyes on real estate. After being impacted by the pandemic, lending rates are declining to unprecedented levels and the situation continues to evolve. 

Despite rising slightly over the past week, the average U.S. mortgage rate for a 30-year fixed loan remains at a low 2.81%, compared to 3.49% in February 2020. At the same time, the 15-year fixed rate is 2.21%, compared to 2.99% in February 2020. These are among the lowest rates ever recorded by Freddie Mac’s Primary Mortgage Market Survey’s near 50-year history.

Mortgage Rates on Rewind: Looking Back  

Mortgage rates were already on the decline – but no one expected 2020 would see such an intense plummet to historically low rates. 

After peaking between 5.34% and 3.95% at the end of 2018, 2019 saw rates slowly begin to decline. By the end of the year, the average mortgage rate was hovering around 3.7%. That’s where 2020 started off – before the pandemic made ground in the United States. 

In efforts to cultivate greater economic stability in the midst of a sudden crisis, the Federal Reserve substantially lowered its interest rates to 0%-0.25%. As a result, lending rates dropped across the board and remained low throughout 2020. With no end in sight to the economic turbulence set off by the pandemic, many analysts expected mortgage rates to stay low

New Year, New Lows 

2021 started off with a bang when the already-low mortgage rates dropped even lower at the closing of 2020. The new year kicked off with the 30-year fixed mortgage at the rate of 2.67%. Not only was this the 15th time that mortgage rates had reached historic lows in a single year, but it also marks the lowest recorded rate since 1971. 

Looking Ahead: Rates Expected to Remain Low 

Time is the most noteworthy factor to observe here. Not only are mortgage rates lower than ever, but they’re expected to remain this way. 

This situation is unprecedented. It’s been almost a year since the Federal Reserve initially dropped the interest rates, but there’s still no end in sight. The lasting economic circumstances of the pandemic are keeping mortgage rates at record lows, and it’s shaping unfamiliar real estate trends for the new year. 

So, how does this impact buying and selling houses in 2021?

A Surge in Home Prices 

Since the Federal Reserve first lowered lending rates, buyers have been eagerly hitting the real estate market to reap the benefits of low interest rates. However, their economically-minded efforts are being thwarted by another factor: home prices are on the rise

More Buyers, Higher Prices 

According to the National Association of Realtors, the median home price rose by 11.4% year-over-year between August 2019 and August 2020. Median home values in August 2020 reached an all-time high at $310,600. The same report notes that August 2020’s sale of existing homes increased 10.5% from August 2019. 

Low interest rates attracted buyers, but that sudden influx of buyer traffic propelled home values to rise. Home sale volumes in August of 2020 reached their highest point since December of 2006. The housing market hasn’t seen this much demand from buyers in nearly fifteen years. 

Low Interest Coupled with High Prices

These two outlier real estate trends are actually canceling each other out. Even though mortgage rates are so low, home prices are higher than they’ve been in years. This means homes really aren’t much more affordable than they were before. 

It’s true that buyers have access to attractively low interest rates on their home loans, but they’re also paying more to purchase the property. The end result of these two situations is that buyers aren’t really seeing the savings expected from the notably low mortgage rates. 

The True Buyer Advantage: Making the Most of Difficult Times 

Even though houses aren’t necessarily any more affordable than they were before, the circumstances are bringing buyers an advantage. Thanks to the record-low mortgage rates, buyers are able to keep up with the rising home prices. 

These two real estate trends have created a situation where buyers aren’t losing. Instead, they’re being supported. 

The economic circumstances are still precarious, and if the mortgage rates had stayed at pre-pandemic levels, buyers wouldn’t be able to afford homes at the levels they are today. Since the rates are so low, aspiring buyers can actually move forward with their real estate deals despite the record-high home prices. 

These two real estate trends have shaped a healthier housing market within the U.S. as deal volumes are stable. After all, it was the tidal wave of buyers that kept the real estate market from crashing during the worst of the pandemic.

Navigating Today’s Market 

Homebuyer activity has been spiking for months now – and the momentum is not expected to let up anytime soon. Anyone interested in buying and selling houses this year needs to be aware of what today’s market has in store for them. 

One of the most important considerations to be prepared for is increased competition between buyers. Lower mortgage rates typically mean more competition as buyers try to gain the benefits of low rates. People who were considering buying a new home are now taking action to make the most of today’s appealing circumstances. 

The real estate market is currently favoring sellers as demand for homes outweighs the available supply. This is another factor that’s prompting buyers to engage in more fierce competition. Sellers have the upper hand as flocks of buyers are responding to their listings. 

Moving forward, buyers should expect more bidding wars. Making smart, strategic, and professionally-guided moves is a must for buyers looking to enhance their home purchase in the new year. 

While the mortgage rates paint a picture of less expensive home sales, the parallel increase in home values is undermining the anticipated savings. But, that doesn’t mean it’s not worth it to buy a home.

Homes for Sale with HomeFinder 

Be sure to keep these tips in mind to make the most of this year’s real estate trends. Shopping for your next home? Visit HomeFinder’s listing portal to browse through our available homes for sale all across the country.