Mortgage rates are at historic lows — but the coronavirus pandemic is making homes less affordable for buyers
June 05, 2020
By Jacob Passy
Young home-buyers are at an especial disadvantage in today’s housing market
There’s never been a cheaper time to get a mortgage for most Americans, but finding a home you can afford is whole other ball game entirely.
The 30-year fixed-rate mortgage increased to an average of 3.18% during the week ending June 4, a decrease of three basis points from the previous week when rates dropped to a record low, Freddie Mac FMCC, +2.77% reported Thursday.
Comparatively, the 15-year fixed rate mortgage remain unchanged from last week, averaging 2.62%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage fell three basis points to an average of 3.1%.
Mortgage rates are once again roughly tracking the direction of long-term bond yields, particularly the yield on the 10-year Treasury note TMUBMUSD10Y, 0.901%, which rose in recent days.
“After Treasury yields rose in recent days in response to some favorable reports on the labor market, service sector and factory orders, mortgage rates did the same,” said Zillow ZG, -3.03% economist Matthew Speakman. “As reports continue to emerge that show the economy may be beginning a modest recovery, suddenly there appears to be upward pressure on bond yields, and thus mortgage rates.”
‘Lack of supply relative to demand is a sure-fire recipe for increasing house price appreciation.’
— Odeta Kushi, deputy chief economist at First American Financial
If the May jobs report that comes out on Friday shows the economy has rebounded considerably from its coronavirus-fueled downturn, then upward movement in mortgage rates could follow, Speakman added.
A rise in rates is just one factor though that could be pushing young home-buyers, who have less reserves than their elder peers, to the sidelines of the housing market.
“In addition to the uptick in rates, banks and lenders have retained tight underwriting standards for home loans, pushing the average credit score above 700, which is causing younger buyers to delay their home purchase,” said George Ratiu, senior economist at Realtor.com. The average credit score among buyers between the ages of 30 and 39 is 673, Ratiu said, which disqualifies them from mortgage financing with many companies.
Lenders raised their credit score requirements as part of many changes they have made to reduce their risk in light of the economic downturn caused by the pandemic. As a result, many young buyers are not able to benefit from the historically low rates on tap right now.
But even those who do qualify for a home loan may not find buying a home to be all that affordable. While home buyers have returned in droves to the housing market after exiting amid the coronavirus stay-at-home orders — as evidenced by mortgage application activity — sellers have not.
Before the coronavirus pandemic, the supply of homes for sale on the market was already severely constrained, and the pandemic has only made matters worse. Existing homeowners now stay in their homes for an average of 12 years, the longest tenure on record, according to a report from First American Financial FAF, -2.07%, a title insurance company.
“Increasing tenure means existing homeowners, who supply the overwhelming majority of homes for sale, are not selling, which limits supply,” wrote Odeta Kushi, deputy chief economist at First American.
That trend is occurring nationwide — not just in the priciest markets. Per First American’s analysis, Birmingham, Ala., experienced the biggest increase in the average tenure among existing homeowners, followed by Atlanta and Indianapolis, Ind.
With supply limited, competition for the homes that are on the market will be fierce. And that will cause prices to go much, much higher. “Lack of supply relative to demand is a sure-fire recipe for increasing house price appreciation,” Kushi wrote.