Experts predict that under a new Biden administration, mortgage rates will remain low, homebuying may become more challenging with the first-time homebuyer credit, and refinancing could be a bargain. Keith Munsell, master lecturer of Strategy & Innovation sits down with Insights@Questrom to answer a few questions on the future of the housing market under the Biden Administration.
BROADLY, WHAT SHOULD HOMEBUYERS KNOW ABOUT THE HOUSING MARKET?
I have a few thoughts about the housing market under the Biden administration, but a little background first. The cost of housing is dependent on mortgage rates, personal credit scores, the amount of value risk a lender is willing to undertake, availability of housing stock, and personal income. Demand for housing is a stool with many legs. Those legs include the economy; interest rate on 10-year Treasuries; housing production, availability of existing housing stock, the price of a home (so demand and supply).
Look at the economy – it has taken a hit with the virus and I predict it will take years to recover even after most of the population has been vaccinated. Millions of people are unemployed or under-employed resulting in a sector of the population not able to afford a home or behind on their mortgage payments. People will get back to work, but that will take time, and as far as the missed mortgage payments, once mortgage forbearance is lifted a lot of homeowners will be in foreclosure. This is a two-edged sword. On one side there will be a lot of pain and the mortgage industry will be hit with lost revenue and thus adjust their pricing (interest on a loan) up, but on the other hand, there will be increased housing stock available for purchase. These will combine to force interest rates up and thus make it more difficult to income qualify for a loan.
10-Year Treasuries – I see these yields rising though not by a huge amount as the mortgage interest rate is influenced by the Treasury yields. With the current National debt rising, the current administration’s deficit spending, and the Biden proposed $2 trillion stimulus bill I predict that mortgage rates will rise making it harder to income qualify for a home loan.
If forbearance is granted, mortgage payments are missed, income is reduced or eliminated, and credit card borrowings rise credit scores will plummet and thus potential homeowners will not qualify for a home loan as these items stay on your credit history for many years. Lenders want a history of earnings, timely payment of bills, and the likelihood that earnings will continue in the future.
Most lenders would like the potential homeowner to have some equity in the home. 20% equity is conventional, though home loans are available with nothing or almost nothing as a down payment. Will the government that currently has attempted to wean itself from underpinning mortgages and mortgages for low- and moderate-income persons move this to the private sector reverse itself? I don’t know, but if it does and encourages low and moderate home buyers back into the market things could change. But, be careful what you wish for as the last time this happened the FHA delinquency and foreclosure rate skyrocketed.
This includes housing production and existing housing stock. The NAHB (National Association of Home Builders) continues to have record production, though the price of materials has skyrocketed resulting in ever-higher new home prices. But new homes only make up a small sector of a robust housing market. The availability of existing homes for sale continues to shrink reducing the supply side of the supply/demand equation resulting in every more expensive housing. This means homes continue to elude a large segment of the market.
As I mentioned before, low- and moderate-income persons have borne the worst of our economic strife. Middle- and upper-income persons, whose ability to work remotely have not seen the same economic pain. As our economy comes back to normal over the coming years that may start to alleviate the income discrepancy. But with reference to housing and homeownership at the same time the economy recovers the interest rate will rise, the cost of housing will rise, and the risk private lenders are willing to undertake will fall.
BASED ON THIS INFORMATION, WHAT WILL THE HOUSING MARKET LOOK LIKE DURING THE BIDEN ADMINISTRATION?
I believe we will see record-low mortgage rates, the move away from cities and limited supply has fueled the housing boom, but will it continue under the new administration, but not without governmental help.