While the pandemic has resulted in some of the lowest mortgage rates in history, based on continued adjustments by the Federal Reserve which has generated unprecedented yields, housing is still in extremely short supply, which is causing a continued increase in prices, making it hard for would-be homebuyers to find an affordable domicile.
Mortgage rates dropped to another historic low this week, making it the eighth time a record was notched in 2020. But despite historically low rates of under 3% for a 30-year mortgage in some cases, homes are becoming increasingly more costly as the housing shortage, massive demand from buyers and elevated home prices outweigh the benefits of lower rates.
According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index, only 59.6% of new and existing homes sold in the second quarter of this year were considered affordable to families garnering an adjusted median income of $72,900, Although the NAHB did take into consideration the pandemic in its income estimates, that’s a fall from 61.3% in the first quarter of 2020, and is the lowest reading in a year and a half.
The inventory of existing homes for sale at the end of June fell 18.2% annually, according to the National Association of Realtors, leaving a scanty 4-month supply available. Supplies of newly built homes also dropped 14.5% annually, according to the U.S. Census.
“The number of homes for sale has reached some of the lowest levels since online platforms began tracking inventory, leading to a frenzied environment of multiple bids, price escalation clauses, and inspection waivers,” said George Ratiu, a senior economist with realtor.com.
While lower mortgage rates are a boon for consumers looking for homes as they offer more purchasing power, they also bolster home prices, and price gains re-accelerated in June after declining in May, according to home appraisal giant CoreLogic.
“Even with attractive rates and rising demand, banks have continued to tighten lending standards in July, further restricting available credit. At this pace, tighter lending standards and low inventory will squeeze housing activity and we will see a substantial slow down in sales in the second half of this year,” added Ratiu.
This slowdown in sales could also be driven by unemployment and a potential worsening of the coronavirus according to some economists.
“The pent-up demand from homebuyers returning to the market continues to support a recovery from the weekly declines observed earlier this spring,” said Joel Kan, an MBA economist. “However, there are still many households affected by widespread job losses and the current economic downturn. High unemployment and low housing supply may restrain a more meaningful rebound in purchase applications in the coming months.”
For investors looking for mortgage ETFs, the iShares Mortgage Real Estate ETF (NYSEArca: REM) and VanEck Vectors Mortgage REIT Income ETF (NYSEArca: MORT) are both climbing Wednesday and a good place to start.
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