What will 2020 bring for the mortgage industry and homebuyers? Tony Weick, leader of Bell Bank Mortgage, looks at trends in the economy, rates, credit and housing inventory – and how they will impact markets and homebuyers in the coming year.
Looking back at 2019, there was quite a shift from when we started the year, and how we anticipated things to play out, compared to where we ended. We entered 2019 with some level of uncertainty about the economy. Some of the storylines throughout the year were tax cuts and their impact, tariffs, wage growth (or lack thereof), the risk of a recession versus a continued growth market, and of course the nation’s ongoing political divide.
While there were many strong economic indicators – including strong corporate earnings, continued low unemployment and increased job creation – there also was growing concern among markets and investors about the direction of the world’s influential economies. Coming off 2018, which saw four Federal Reserve rate increases and a feeling of strong economic advancement, by July 2019, the Fed had adjusted its views and initiated a trend of rate cuts. There were three cuts in the remainder of the year, and the markets are forecasting possible additional cuts in 2020.
While Fed Fund rates do not directly impact mortgage rates (which are more closely tied to the 10-year Treasury yield), a similar trend was seen in mortgage markets during 2019. Even with all the competing data and headlines, the stock market finished 2019 with great momentum, again reaching all-time highs. As we finished the year, the general feeling of uncertainty remained – especially in looking at data that seemed to contradict historical indicators.
We entered 2019 coming off a high point in mortgage interest rates, which briefly hovered around the 5% range just before the start of the year. As much of the industry had expected rates to stay in this higher range (or possibly even continue to increase moderately), what we ultimately saw was a major shift in headwinds not only for the U.S. economy, but also across the globe. People started the year asking, “How high will rates go?” But by mid-March, rates started a downward trend – which then changed the question to, “How low can rates go?” Eventually, rates moved to near-historical lows. These low rates initiated another mini-refi boom in 2019, as well as spurring increased purchase activity as homeowners took advantage.
As we look ahead into 2020, a general feeling of uncertainty (similar to last year’s) remains. However, the specific factors impacting our take on the economy have evolved. There are several issues, both globally and at home, from debate on the impact of tax cuts to recessionary versus bull-market beliefs – and don’t forget 2020 is an election year, with all that comes with it.
Taking these variables into account, the mortgage industry anticipates a relatively flat rate environment over the next year, with some moderate volatility based on specific events. While we would expect rates to remain very attractive and at the very low end of historical averages, refinance activity is expected to drop over 25% year over year. This will cause an overall drop in total originations, as a slight increase in purchase activity will not completely offset the drop in refinancing.
In 2019, the credit markets continued to see some expansion as the mortgage industry grappled with how to deal with affordability and rising home prices. The realities of student loan debt and lack of resources for down payments have impacted many potential borrowers.
To promote affordability there has been a trend in slight – but appropriate – loosening of credit, as well as a significant push by many players to help educate people on homeownership and what it entails. Our industry continues to focus on fine-tuning programs to help overcome challenges for first-time homebuyers. These include not only broadening the qualifying standards for borrowers, but also expanding traditional mortgage programs to include loans for condominiums and manufactured-housing alternatives – two key property types that support many affordable housing initiatives.
A continued theme in 2019 was the lack of inventory in most markets and many price ranges. Entry-level or first-time homebuyers, in particular, found severe shortages in the lower- to moderately-priced homes that would be attractive to them. While the spring market drove very strong price appreciation – fueled by this lack of inventory coupled with the low rate environment – the pace slowed toward the end of the year, especially in the higher-priced segment. While the year started with multiple offers on what seemed like every listing, and homes selling in hours rather than days, the pace had definitely slowed in most markets by year-end. If you look at the statistics, much of the country continues to see an undersupply of available homes for sale in all but the high-end price ranges, a trend that is expected to continue into 2020.
Another continued and somewhat surprising theme is lagging activity in new construction compared to market needs. While 2019 definitely saw an uptick in activity in many markets, new construction continues to lag behind the demand. Increased material costs, lack of available land for development, and a labor shortage have led to sharp increases in the cost of building. That has driven new-home costs even higher, and while there were signs of some activity in low to moderate price ranges, there remains a significant gap in what the market could absorb.
Although there doesn’t seem to be an easy solution for the challenges limiting new construction activity, the market heading into 2020 is by all accounts considered healthy, with builder sentiment continuing to be positive.
We're excited about the future, and there’s much to be optimistic about. Based on the forecasts for 2020, it appears rates will remain very attractive to buyers, especially when considering historical levels. Home appreciation is expected to continue at a more modest, healthy pace for the majority of the country, and the industry continues to bring creative solutions to the market to support today’s homeowners.
Using new and improving technology, coupled with good old-fashioned professionalism, competitiveness and customer service, we expect great things for Bell – and our business partners and clients – in 2020 as we apply our company’s values of family, service and giving back to the work we do with the people we serve.
If you are thinking about buying a new home, second home or investment property, or evaluating your mortgage on an existing property, Bell would love the opportunity to help you determine what’s in your best interests. As always, we welcome your business and referrals and would be honored to serve you.