A once-in-a-lifetime global crisis has a way of rewriting normal life, from small adjustments to big reorganizations, from temporary changes to long-lasting shifts. Most of us have changed how we work, socialize, shop, enjoy family, and more. Six months into the pandemic, it is also clear that home buying has changed.
Buying a home in 2020 is unique in two major ways. Fewer homes are on the market than ever before, for reasons having to do with the coronavirus but also because inventory was projected to be low already and the crisis only made things worse. Second, interest rates dropped to lifetime lows during the emergency, generating strong interest among borrowers.
Let's look at several ways in which home buying is different right now.
Interest Rates Went Down, Way Down
"Record low interest rates!" sounds like marketing hyperbole, but it was just plain true during many early weeks and months of the pandemic. Many people in the industry wondered how low mortgage rates could possibly go. The answer seems to be 2.25% because any further drop removes the profit motive for lenders¹, and who's in business to make zero money?
Rates started sinking with the rise of coronavirus cases. Thirty-year home loan rates have been teetering around 3% for 11 straight weeks. Borrowers keen to strike while the iron is hot have been enjoying a period of low rates that previous generations could only dream of, a definite bright spot in an otherwise tumultuous and challenging year.
Potential home buyers aren't the only ones galvanized by record low rates. Refinancing is up 192% according to the Mortgage Bankers Association.
Current mortgage rates
Lenders who respond to a weekly survey conducted by Bankrate give us a good snapshot of current rates on different loan products. Average rates for October 2020:
Average Mortgage Interest Rates for Oct. 2020
|30-year fixed rate||3.05%||3.36%|
|30-year FHA rate||2.90%||3.56%|
|30-year VA rate||2.82%||2.98%|
|15-year fixed rate||2.56%||2.87%|
How long will rates be this low?
Historically, mortgage rates are directly linked to what happens with U.S. treasuries. Matthew Graham, chief operating officer of Mortgage News Daily, says, "Mortgage rates are finally mostly caught up to where treasuries say they should be."²
He continues, "There's still a good amount of optimism as to how the economy may bounce back from the recent trauma. Evidence of a 'double dip' recession—something that could help rates move even lower—has yet to materialize. Economic data continues to improve in general, especially in the housing market."
We reached a major milestone when mortgage interest rates broke the 3% barrier. They have been hovering around this point for 11 straight weeks. Today it's not a question of getting good and bad rates—they're all good. Whether you qualify to lock in, say, 2.89% or 3.39%, you are the envy of earlier home buyers.
High Home Prices
In the midst of a historic economic downturn, home prices skyrocketed. Buyers across the country are scrambling to secure a limited number of reasonably priced homes.
According to recent data from Realtor.com, the median home price at the end of July shot up 9.1% compared to the end of July one year before. July's average home price was an all-time high of $349,000. The pandemic is the only explanation for why homes could rise to "mind-boggling high prices" in the middle of a recession with the worst unemployment since the Great Depression.
Strong demand clashing with low supply allows home sellers to raise their asking price.
"When the pandemic helped tip the U.S. economy into recession, most homeowners and home buyers braced for falling house prices," said the chief economist at Realtor.com, Danielle Hale. "That's what happened in the last recession. But that's not what we're seeing in today's market. We had a housing shortage already, and the pandemic has created conditions that have only worsened it."³
Where are home prices rising most and least?
Pittsburgh tops Realtor.com's list with a 25% jump year over year and a median price of $249,950. Los Angeles follows with a 24.3% jump compared to last year and a $994,154 median price.
Only two large metro markets saw home prices fall, both in Florida. Home prices in Miami dipped 1.5% year over year, and Orlando dipped 0.9%. Their median home prices were $403,826 and $320,050, respectively.
The number of homes on the market now is not just low; it's at a historic low per many analyses, such as the one by Black Knight's Collateral Analytics. The lack of supply is not entirely due to the virus. Forbes projected a lack of housing back in December 2019. But COVID has exacerbated the situation.
Aside from a reluctance among homeowners to sell and relocate during uncertain times, another reason that homes are not going on the market is because of a dearth of contractors and building supplies.⁴. Anecdotally we hear of six-month waiting lists for contractors. Shortages in lumber and other materials are keeping repairs from being made and thus keeping homes from being listed.
Home Showings Have Gone Virtual
For home sellers, the need to show the property to prospective buyers conflicts with a desire to maintain social distance. Numerous strangers talking and breathing throughout your home is not a good idea in a respiratory pandemic. Agents showing new homes are likewise not pleased with the unavoidable indoor closeness to other people.
The answer is live video. Real estate companies have seen demand for virtual showings increase fivefold. Real estate brokerage Redfin, which has long focused on leveraging technology to sell real estate, saw a 494% jump in requests for agent-led video home tours in March. The company uses live walkthroughs, 3D room scans, and more to enhance and inform the home buying experience while limiting personal contact.
When you shop for a home, expect to find more thorough photography and video in the online listings and perhaps a live chat with an agent before ever stepping over the threshold of your potential new home.
- Today's mortgage rates are historically great, so enjoy this rare bright spot in the economy.
- Expect to look harder for reasonably priced homes because of the shortage.
- High demand can spark bidding wars, so adjust your initial offer accordingly.