TheMReport — News and strategies for the evolving mortgage marketplace.
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22 | M R EP O RT COVER STORY we've never seen such a drastic movement in employment, and that's driving the concerns and the uncertainty about increased job loss and duration." The low-rate environment has been one of the few advantages brought on by COVID-19. Freddie Mac's Primary Mortgage Market Survey on May 14 said the average 30-year fixed-rate mortgage aver- aged 3.28%—essentially unchanged from the prior week's 3.26%. The average 30-year fixed-rate mortgage was 4.07% at this time last year. Danielle Hale, Chief Economist for realtor.com, said there are three factors that impact housing afford- ability: income, home prices, and mortgage rates—and COVID-19's interaction with these factors is "complicated." "Mortgage rates had been steady to end 2019, but as concerns around COVID-19 grew, mortgage rates began to drop. From the end of December 2019 until now, mortgage rates are roughly half a percentage point lower," Hale said. She added that this is actu- ally boosting buyer affordability and helping current owners who are able refinance into a lower mortgage rate. While continually growing, home prices are not helping afford- ability, the growth rate of prices has slowed, which is a welcome assist to buyers, Hale added. "We expect this growth rate to continue to slow, and in some markets, we are seeing mild price declines, so on the price side, COVID-19 is improving affordabil- ity," Hale said. Edward Pinto, Director, American Enterprise Institute's Housing Center, agreed with Hale's remarks, suggesting that affordability has improved due to falling interest rates. He added that home-price growth was at6-7% in February and early-March, dropped to about 4% in late-March and early-April, but recent data shows that has recovered to 5-6% in mid-May. "If it hadn't been for the market disruption caused by the corona- virus, our estimation was that we would have seen a very high house price appreciation in this buying season. So that combined with lower interest rates, has made hous- ing more affordable," he said. "The negative impact is that lending standards have been tightened, so potential homebuyers who would have barely qualified for a mortgage two months ago may have to wait to improve their financial picture before buying," said Brian Koss, EVP of the Mortgage Network. Odeta Kushi, Deputy Chief Economist for First American Financial Corporation, echoed those sentiments. She said recent events have created an affordability "tug-of-war." "On the one hand, the 30-year, fixed-rate mortgage hit a histori- cally low level of 3.2% in April, and on the other, the unprecedented labor market decline will reduce affordability for those that lose their jobs and experience a decline in household income. Meanwhile, house prices have continued to appreciate," she said. Freddie Mac's Chief Economist Sam Khater said the pandemic has caused forces to pull in op- posite directions. "There's of course the downturn in the economy which has caused unemployment to rise and will cause income growth to stagnate, which will worsen affordability," Khater said. "But for those whose incomes have not been impacted, it's improved affordability due to the drop in mortgage rates and at the margin, less competition for the same home on the market." Kushi added that it is the prevailing thought that mortgage rates will remain below 3.3% for the remainder of the year, which will continue to boost affordability. Kushi added, however, that it is too soon to tell what path hous- ing appreciation will take, as past recessions have shown prices are "downside sticky"—meaning the pace of annual appreciation may slow but is unlikely to decline. "The path of household income will be dependent on how fast the labor market rebounds," Kushi said. "Affordability looking ahead will depend on the tug-of-war between lower mortgage rates and continued house price appreciation amidst a backdrop of rising unemployment." Richard Ferguson, President, CBC Mortgage Agency, said afford- ability could improve—momentarily and in pockets—but long-term af- fordability will not improve unless there is a prolonged recession. "There are fewer buyers for now, given the uncertainty in the market. But on the other hand, supply is tight and getting tighter as more potential sellers opt out of selling," Ferguson said. He added that the supply- demand dynamic will settle back into pre-pandemic levels "within months," and housing will be back where it was a few months ago: Too little supply and high levels of household formation among millennials, meaning that rising pricing pressures will con- tinue to be the norm. Impact on Younger Generations M illennials, and now Generation Z, were making headway in the housing market prior to COVID-19. A study by the National Association of Homebuilders found that while the number of prospec- tive Gen Z buyers fell from 20% in Q1 2019 to 13% in Q1 2020, the mil- lennial share grew to 16% from 15%. Additionally, 61% of buyers in Q1 2020 were first-time buyers, which is a minimal increase from Q1 2019's 60%. Kaminski said a good portion of millennials entering the housing market went through the Great Recession more than a decade ago, and therefore may approach home- ownership more cautiously during times of economic uncertainty. The demographic Kaminski is most concerned with is Gen Z, as many are just starting their professional careers, with them having jobs in the industries hard- est hit—retail, hospitality, leisure, travel, and entertainment. "I think some of these younger generation workers are certainly feeling the impact like everybody else who works in those indus- tries—in some cases, the strain is much more significant because they don't have savings to fall back on. This could certainly play a role in delaying homeowner- ship," Kaminski said. Kushi said that, while near- record low mortgage rates make housing more affordable, especially with those with stable incomes, tightening credit standards, and "If it hadn't been for the market disruption caused by the coronavirus, our estimation was that we would have seen a very high house price appreciation in this buying season." —Edward Pinto, Director, American Enterprise Institute's Housing Center