By Holden Lewis
It’s going to be brutal here for home buyers in the second half of 2021. Mortgage rates will rise, house prices will continue to rise and buyers will continue to face competition. Here are home trends to look out for in the final months of the year.
Mortgage rates are likely to rise
According to the major forecasters, the 30-year fixed-rate mortgage will rise in the second half of 2021.
Fannie Mae (FNMAO) and Freddie Mac (FMCC) forecast interest rates to rise about two-tenths of a percentage point, the National Association of Realtors expects it to rise by three-tenths of a percentage point, and the Mortgage Bankers Association predicts a rise of half a percentage point.
If you take the average of all their forecasts, the consensus forecast is that the 30-year mortgage will average 3.38% in the last three months of 2021, an increase of three-tenths of a percentage point from the average rate of the second quarter of 3.08%.
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I agree mortgage rates will rise between a quarter and a half percentage point in the second half of the year as wages rise and the Federal Reserve begins talks of monetary policy tightening.
But I don’t have much faith in this forecast because interest rates are volatile and there is a possibility that the fight against the pandemic will be one step forward and three steps back. If a resurgence of Covid-19 slows the economy, mortgage rates could stay roughly the same or fall even lower.
House prices will remain higher
According to the National Association of Realtors, sales prices of existing homes skyrocketed in the first half of 2021. The median used home price was $363,300 in June, up 23.4% from 12 months earlier. The median price was a record high.
The rate of price increases in 2021 was unexpected. The spring consensus between Fannie Mae, the NAR and the MBA was that the average existing home price would be around $331,500 at the end of the year. But the June median price surpassed that year-end forecast by more than $30,000.
Prices rose rapidly as demand outstripped supply. And demand will continue to outstrip supply for a long time to come. House prices will continue to rise in the second half of 2021 and beyond.
Demand for housing will remain strong
Millennials started late. They formed households at an older age than boomers and Gen-Xers. Now the millennials are starting to catch up with their ancestors as they buy their first houses.
People form a household if they live alone or together. Americans averaged about 856,000 households per year from 2013 to 2016, according to research from the Harvard Joint Center for Housing Studies. After that, family formation accelerated to an average of 1.3 million per year from 2016 to 2019 (the last year for which we have statistics).
This lavish family boom has its roots in the late 1980s and early 1990s, the most prolific years of millennial births. Those babies are now in their mid-twenties to early thirties — the household-forming years.
In addition to rapid family formation, there’s something else going on: the desire to own rather than rent seems to be on the rise, as evidenced by the rapid rise in house prices and widespread bidding wars. This buying frenzy will linger.
Tamir Poleg, chief executive of startup The Real Brokerage, agrees. “I don’t see the market cooling down anytime soon,” he says. “Even if interest rates rise, demand will still be significant.”
The housing shortage will continue
Not enough houses are available because builders haven’t built enough. The housing shortage dates back to the Great Recession. Only 585,000 homes were completed in 2011, less than a third of the total five years before, during the housing boom.
Construction has slowly recovered, with 1,287 million homes completed in 2020. For more than a decade, not enough homes have been built each year to meet the needs of the population. Sam Khater, Freddie Mac’s chief economist, estimates there will be a shortage of 3.8 million homes by the end of 2020.
A shortage of millions of homes cannot be solved quickly. The country builds just over a million houses a year and production capacity could be about double. Some 325,000 homes are now removed from the housing stock every year, often by demolition (intentionally) or destruction (accidentally).
Housing construction is unlikely to accelerate in the remainder of 2021. A limiting factor is the shortage of computer chips that control devices. If you’ve recently bought a clothes washer or refrigerator, you know that the selection is limited and the earliest delivery date could be weeks or months. Your builder does not want to sell a new home without a refrigerator. Shortages of wood and other materials, and associated high prices, have also contributed to construction delays.
The Fed Will Be Introspective
Policymakers at the Federal Reserve are concerned that their easy-money policies are contributing to rapid home price increases, and are debating whether to do something about it.
In the pandemic era to support the economy, the central bank has been buying $40 billion a month in mortgage-backed securities. That keeps the mortgage interest rate low. Low rates, in turn, lower monthly payments, allowing homebuyers to take out larger loans. Larger loans mean that people can pay more, leading to higher house prices in all markets.
But the Fed had no intention of letting house prices rise by double digits annually. Some Fed policymakers feel chastised by the outcome of their policies.
At the Fed’s June meeting, some unidentified members of the committee wondered aloud whether they should cut back on mortgage purchases sooner in order to raise mortgage rates and slow home price increases. They made no changes to the June meeting, but agreed to continue talking about it.
The Fed aims to be predictable, so eventually it will probably decide to cut mortgage purchases on a schedule similar to that after the Great Recession.
Bottom Line for Home Sellers and Buyers
Home prices are at record highs and buyers often compete with competing bidders. So sellers feel up and buyers feel down.
According to Fannie Mae’s Home Purchase Sentiment Index, 77% of respondents in June said it was a good time to sell – and 64% said it was a bad time to buy. That attitude is likely to continue for the rest of 2021, as supply of homes for sale falls short of demand.
As for home sellers, you might be thinking, “Well, good for you, I think you can move on very easily.” But most home sellers are buyers too, because they are upgrading, downsizing, or moving. Selling is sweet in this market, but buying is sour.
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Holden Lewis writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @HoldenL.