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2021 Housing Market Outlook and Mortgage Forecast

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The housing and mortgage markets have been bright spots in an otherwise gloomy coronavirus-challenged economy. The 2021 housing market outlook includes higher prices for new homes, which translates into more home equity for existing homeowners to tap. The mortgage forecast is for continued low mortgage rates, but homeowners with mortgages in forbearance may face some potential headwinds when federal protections expire soon.

2021 housing market outlook

The lack of available housing inventory combined with low mortgage rates is keeping the housing market on solid footing heading into 2021. The housing market has been surprisingly resilient, with median existing-home prices spiking 14.6% from November 2019 to November 2020, according to the National Association of Realtors (NAR).

States ordered residents to shelter in place during the COVID-19 outbreak in March, effectively bringing the economy to a standstill and, with it, home showings and closings. As the stay-at-home orders eased, the housing market bounced back.

“For example, the lost sales in spring have now all been recovered,” said Gay Cororaton, senior economist and director of housing research for the NAR. According to the NAR, existing-home sales saw double-digit increases in 2020, up 25.8% in November 2020 over the same period the year prior.

Here are four key housing trends to watch in 2021:

Housing prices will remain high despite the COVID-19 pandemic

Home prices are expected to climb 8% in 2021, continuing 105 straight months of year-over-year gains through November 2020, according to the NAR.

“The inventory of homes for sale stood at 2.5 months as of October, and this tight supply has tended to push up prices,” Cororaton said. “Secondly, housing demand is very strong, because mortgage rates are also at a historic low.”

Rising home prices mean more equity for existing homeowners

Many homeowners gained nearly $39,500 more in equity in 2020 than a year before as existing-home prices saw double-digit price appreciation from year-over-year in November 2020.

Homeowners may be able to tap some of their equity with a cash-out refinance, or take out a home equity loan or home equity line of credit (HELOC) to make home improvements or pay off high-interest credit cards.

Extra equity may also help offset interest charges piling up for borrowers unable to make payments while their mortgages are in forbearance. And for homeowners who might need to sell their homes, higher home prices and strong demand might translate into a quicker sale with a higher net profit.

“Homeowners who are having trouble keeping up with their mortgage will find it faster to sell their home,” Cororaton said, noting that homes are staying on the market for just a median 21 days.

Continued low interest rates keep fears of a housing market crash at bay

The quick action of the Federal Open Market Committee, or the Fed, to lower the federal funds rate and invest heavily in mortgage-backed securities and other instruments helped drop rates to historic lows below 3%. This gave financially-strapped homeowners more opportunities to refinance and reap significant cash savings.

Thanks to the Fed’s actions, the pending expiration of forbearance protections provided to borrowers within the Coronavirus Aid, Relief, and Economic Security (CARES) Act isn’t likely to send home prices falling, Cororaton said.

It appears the Fed may have learned its lesson after the Great Recession, lowering the fed funds rate to 0% in March 2020, down from 1.5% in January 2020. That’s a far cry from the two years it took to lower the funds rate from 4.3% in December 2007 to 0% in January 2009 during the housing crisis and U.S. economic downturn. And with low rates expected to stick around in 2021, homeowners that haven’t refinanced may still reduce their mortgage payment with a refinance, giving them the budget relief they need to help make ends meet.

Remote workers will drive urban home prices down

Although the share of employees working from home has dropped to 21.8% in November, down from 35% in May, according to 2020 data from the U.S. Bureau of Labor Statistics, permanent shifts to remote working may have an effect on some housing markets.

“I think working from home will have the most impact in the expensive West Coast tech metros if workers are allowed to work from home full time,” Cororaton said. She added that those workers might seek out less expensive cities to relocate to like Phoenix, Austin or Atlanta, to name a few.

The downside, though, is up-and-coming suburbs might see faster home-price appreciation, making them less affordable, while urban areas might see price declines, Cororaton said.

2021 mortgage forecast

The mortgage industry enjoyed a record-breaking year in loan origination volume. Borrowers took advantage of buying or refinancing homes as interest rates fell below 3% for the first time in history. In November, Freddie Mac predicted 2020 mortgage originations would top out at $3.6 trillion, then taper off to $2.7 trillion in 2021.

Here are four key mortgage rate trends to watch:

Mortgage rates will remain low

The coronavirus pandemic that rattled the U.S. economy (and the world) last year hasn’t gone away. The same economic challenges will persist in the year ahead, and the Fed is likely to keep its target rate low. Freddie Mac’s mortgage forecast calls for 30-year fixed rates to hover around 3%.

The Mortgage Bankers Association (MBA) has a slightly different take on mortgage rates in 2021, predicting economic growth and stimulus spending this year will drive 30-year fixed rates up to 3.3%. However, the brisk pace of refinance activity will last through the first half of 2021 before slowing down in the second half of the year, according to the MBA.

Higher loan limits will help offset home-price growth

The Federal Housing Finance Agency (FHFA) raised conforming loan limits in most areas of the country to $548,250, up from $510,400 in 2020. This move gives homebuyers access to the flexible underwriting guidelines offered by conventional lenders in order to afford a more expensive home.

Borrowers with lower credit scores or heavier debt loads have access to more borrowing power with loans backed by the Federal Housing Administration (FHA). FHA loan limits also rose to $356,362 in 2021 — more than $24,000 higher than the previous year’s limit — in most parts of the country.

Higher loan limits help homeowners avoid complicated and hard-to-get jumbo loans. Higher loan limits also mean refinance borrowers can tap more equity with conventional and FHA cash-out refinances, which may be worth considering as home prices continue to climb.

CARES Act forbearance protections have been extended

Homeowners who need mortgage relief for loans serviced by Fannie Mae and Freddie Mac, as well as FHA, VA and USDA loans, are protected by a provision in the CARES Act. The deadline to request mortgage forbearance to avoid foreclosure has been extended to:

  • Feb. 28, 2021 for FHA, VA or USDA loans
  • No deadline for Fannie Mae or Freddie Mac loans

The new foreclosure guidelines mean your lender can’t foreclose on your home until:

  • After Jan. 31, 2021 for a loan backed by Fannie Mae or Freddie Mac
  • After Feb. 28, 2021 for FHA, VA or USDA loans

According to the MBA’s January Forbearance and Call Volume Survey, 2.7 million homeowners’ mortgages were in forbearance as of Jan. 3. Many people still mistakenly believe their only forbearance repayment option is a lump-sum payment of the entire past-due balance after their forbearance period ends. That’s just not true, though.

“The reason people think that is because many servicers are listing that option first on the list of options that are potentially available,” said Ellie Pepper, relationships and innovations director for the National Housing Resource Center.

According to the Consumer Financial Protection Bureau (CFPB), you won’t have to pay back the entire balance of missed payments in full after your loan’s forbearance period expires. Request other options from your lender. These might include a monthly payment plan, which allows you to spread out the missed payments over several months until you’re caught up, or a payment deferral, which adds the missed payments to the end of your loan, so you don’t have to pay them off unless you sell or refinance your home.

How lenders calculate your ability to repay a mortgage has changed

Since 2013, the CFPB has recommended that borrowers’ total debt-to-income (DTI) ratio shouldn’t exceed 43% to ensure they can repay their mortgage. Your DTI ratio is calculated by dividing your total monthly debt (including the new mortgage payment) by your gross (before-tax) monthly income.

The CFPB exception allowing mortgage companies to lend above the previous 43% limit expired on Jan. 10, 2021. Under the new guidelines, the 43% DTI ratio limit is replaced by a “priced-based qualified mortgage definition.” In other words, if the APR is less than 2.25 percentage points below the average prime offer rate for a similar transaction, then the loan is considered a qualified mortgage.

Lenders may also have the option to analyze a borrower’s bank statements or disposable income to help you qualify, as an alternative to pay stubs, W-2s and federal tax returns. However, you may not see changes to how your loan is approved until this summer because the new guidelines don’t become mandatory until July 1, 2021.


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