The pandemic housing rally is getting its first big test.
Mortgage rates rose in each of the past three weeks, driven by a bet that inflation will accelerate as the US economy roars back this year. While borrowing costs are still near historic lows, the quick jump has already begun eroding the purchasing power that enabled buyers to push up home prices across the country in recent months. The bidding frenzy has been one of the big surprises of the pandemic. When lockdowns lifted, buyers -- armed with low mortgage rates -- emerged with a newfound urgency to acquire properties with enough room for home offices and Zoom school. Intensifying the competition for a tight supply of listings was a dramatic shift as millennials, who’d spent years renting in urban centers, came into prime home-buying age. The question now is whether the market can stay hot as rates creep up. “The reasons why people are trying to buy homes right now go beyond mortgage rates,” said Danielle Hale, the chief economist at Realtor.com. “I don’t think demand is going to go away, but it’s going to create yet another hurdle as people navigate how to get into the market -- particularly for younger, first-time buyers.” Last week, the average rate for a 30-year fixed mortgage climbed above 3% for the first time since July, according to Freddie Mac. That’s up from the record low of 2.65%, reached in early January. Even small changes in interest rates can have a big impact for buyers. In a report this week, Redfin Corp. calculated that an increase in mortgage rates to 3.25% from 2.75% would mean that a borrower on a $2,500-a-month housing budget would lose $23,250 in purchasing power. At the higher rate, about 68% of homes would be affordable for the buyer across the US, according to Redfin’s analysis, which looked at homes for sale between Jan. 26 and Feb. 25. That compares with about 70% at the lower mortgage rate. Even bigger impacts would hit buyers in Denver and Sacramento, California, where the share of homes affordable on that budget would decline by 3.7 percentage points. For now, though, rising borrowing costs don’t appear to be driving a wholesale exodus from the market. Purchase activity has cooled some in recent weeks but is still on par with levels seen a year ago, before the pandemic, Freddie Mac said last week. In the Denver area, Carlos Gomez and his girlfriend, Angela Davies, were initially surprised to learn they could afford a $450,000 house and still stay within their monthly budget, thanks to rock-bottom borrowing costs. Now that rates are rising, they may be forced to look at a lower price point, where there are even fewer available properties, Gomez said. “It’s going to knock us out of the game,” said Gomez, adding they had already lost out on two houses to all-cash buyers. For Tammy White, a teacher in Sacramento, the timing couldn’t be worse. She cleaned up her credit over the past year so she could qualify for a mortgage and buy a home. Now, she’s concerned that higher loan costs will lock her out of the market because she’s unwilling to take on an obligation that will prevent her from affording activities for her daughter. “If it goes above what I can comfortably afford and take care of a very busy 5-year-old, I’m going to have to pull out,” White said. “I’m not going to overbid on these homes, where I come upside-down on a loan. I’m trying to be smart about it.” Even with some buyers more restrained on what they can pay, home prices are still likely to rise at a brisk pace, because of the underlying demand and tight supply, said Matt Speakman, an economist at Zillow. Still, buyers are going to have to get used to paying more for mortgages going forward. “It sure looks like the days of all-time low rates are behind us,” Speakman said. “Broadly, pressure on rates will continue to be upward as the economy continues to improve.”
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Hawaii and Nevada experienced the largest annual increase in overall delinquency rates in 2020, exacerbated by millions of Americans losing their jobs during the pandemic.
Black Knight’s December Loan Performance Insights Report revealed that overall delinquency rates rose 2.1% year over year, with 5.8% of mortgages in some stage of delinquency (30 days or more past due, including those in foreclosure). Hawaii and Nevada posted the biggest gains (both up 4.1%), followed by New York (up 3%), Louisiana and New Jersey (both up 2.8%), Maryland (2.6%), and Mississippi (1.5%). “Places with large job losses during the last year also experienced big jumps in mortgage delinquencies,” said CoreLogic Chief Economist Frank Nothaft. “By state, Hawaii and Nevada had the largest 12-month spike in delinquency rates, both up 4.1 percentage points. They also had large increases in unemployment rates, up 6.6 percentage points in Hawaii and 5.5 percentage points in Nevada compared with 3.1 percentage points for the US. In Odessa, Texas, unemployment rose by 8.6 percentage points, and delinquencies posted a 9.8 percentage-point jump.” The number of seriously delinquent mortgages (90 or more days past due) climbed to 3.9% in December, up from 1.2% a year ago. Meanwhile, early-stage delinquencies (30 to 59 days past due) dropped four basis points to 1.4%, and adverse delinquencies (60 to 89 days past due) inched down one basis point to 0.5% year over year. Foreclosure inventory rate or the share of mortgages in some stage of foreclosure also fell from 0.4% in December 2019 to 0.3% in December 2020. New analysis from personal finance company NerdWallet has found that while homeownership rose to 75% among white Americans in 2020, only 44% of Black Americans owned homes. This puts Black Americans at the lowest homeownership point of the minority groups studied by NerdWallet, behind Asian Americans (60% homeownership rate) and Hispanic Americans (49%).
While the reasons behind such a stark racial disparity are complex and highly intersectional, analysis from NerdWallet points to the ongoing structural legacy of redlining as a key reason Black homeownership rates have lagged for decades. Redlining originated during the New Deal when new government institutions, including the Home Owners Loan Corporation (HOLC) and the FHA, were created to back up the then-suffering housing market. Those institutions rolled out some of the first government-insured mortgages at low rates to homeowners nearing foreclosure. In doing so, they assessed mortgage risk by neighbourhood. That assessment was explicitly racist. Predominantly white neighbourhoods were considered “less-risky” and marked on HOLC maps in green or blue. Areas with large numbers of Black, Jewish, and Asian families were typically shaded in red, giving rise to the term ‘redlining’ and meaning, for whole populations across America, getting a home loan became effectively impossible. While title VIII of the Civil Rights Act of 1968 (commonly called the Fair Housing Act) prohibited housing discrimination on the basis of race, color, religion, or national origin, many analysts have noted that the long-term legacy of redlining has never been fully dismantled. Between inadequate enforcement and the simple fact that Black Americans were prevented from building generational wealth through homeownership at a time of rapid economic growth, the legacy of redlining appears to be alive and well in American homeownership rates today. “Even though the redlining maps are no longer used by lenders, the remnants exist today,” said Linda Bell (pictured), NerdWallet spokesperson and the author of its recent analysis on redlining. “We see it in pair testing studies across the country where equally qualified people of different races are shown different properties in white neighborhoods. We see people of color discriminated against here, being shown fewer homes in these white neighborhoods. We’ve even seen racially restrictive covenants still contained in deeds. They’re no longer enforceable under the law, but they’re still in the deeds, preventing sales to Blacks and other minorities. “The remnants of redlining still exist today, and it’s quite unfortunate.” Bell attributes the lasting legacy of this racist policy to a failure of enforcement on the part of federal and state governments. Between the Fair Housing Act, the Equal Credit Opportunity Act and the Community Reinvestment Act, the legal framework exists to more meaningfully dismantle the legacy of redlining and systemic racism in American housing. To Bell, these laws just need to be properly enforced. Beyond enforcement, Bell believes legislation aimed at repairing the damage done during the redlining decades could make a meaningful impact as it might make homes currently unaffordable to many Black Americans with no family history of homeownership more accessible. From a lender’s perspective, Bell believes that offering smaller-dollar loans will improve the overall affordability picture for housing across America, while helping to lift up Black homeowners in particular. She emphasized, as well, that lenders and underwriters can start looking at metrics beyond credit score when assessing borrowers. While credit is obviously crucial in assessing a borrower, Bell believes that track records of rent and utility payments should be more meaningfully factored into assessments. Bell also explained what individual mortgage professionals can do to help rectify the difficult situation facing aspiring Black homeowners. Through outreach and education efforts, she said, mortgage professionals can make a meaningful impact. As MPA has reported in the past, families that have been excluded from the housing market on a generational basis lack the ability to inform their children about the mortgage process. By offering personal financial resources and education to more Black Americans, mortgage professionals can close the knowledge gap. Bell believes that for any mortgage professional, making that effort is both the right thing to do, and a means of growing your volume even further. “It’s important for Black households because it can close the racial wealth gap,” Bell said. “But that gap holds back the growth of the economy and the housing market as a whole. We need to take ownership of this situation and ask how we can improve it, because it’s everybody’s responsibility to make homeownership accessible to all Americans.” |
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