August 4th, 2020 5:04 AM by Richard Sardella MLO.100007700/NMLS 233568
Millennial renters are turning into buyers as paying rent no longer makes sense
The Census is a revealing thing every ten years. And this year, it's even more revealing, even though it's not yet complete. It changed its methodology over the past quarter, eliminating all in-person interviews due to the pandemic. And while that means it may have distorted the data a bit, it revealed a large jump in homeownership rates.
According to Redfin's Taylor Marr, homeownership rates surged to 67.9% in the second quarter, the highest rate since 2008. The 3.8 percentage point increase from 64.1% a year earlier is the largest annual increase in homeownership rates on record. While that is remarkable, however, there are several intertwined pandemic-related trends that have likely led to the strong growth in homeownership.
The first is demographics. "The homeownership rate climbed the most among 35-44 year olds (up 4.9 percentage points to 64.3%) and people under 35 (up 4.2 percentage points to 40.6%)," says Marr, who adds that demographically, it was anticipated the homeownership rate would grow in 2020 because a huge wave of millennials entering their prime home-buying years, the pandemic may have moved up this timeline in the short-run.
"Many renters who had perhaps been planning a purchase in the next few years, have opted to go ahead and buy now given historically low rates," he says. "Thus, the current growth will likely not continue to climb as much in future quarters." Keep in mind that these low rates hit when apartment living has hit its least popular point. "People confined to their homes aren't able to take advantage of communal building amenities or the neighborhood retail and restaurants that make renting in an urban area appealing," says Marr.
Add to that how much time is being spent at home during sheltering and quarantine, and you'll find home buyers are rethinking their priorities. One Redfin agent contributed her thoughts by saying, "Spending so much time at home during quarantine has made a lot of people realize that it might be time to stop renting a cramped apartment in the city and time to start owning their first single-family home." Of course, with mortgage rates at record lows and remote work on the rise, renters are realizing that they could buy a lower-priced home in the suburbs for close to what they're paying in rent.
Marr explains how the math has shifted in favor of buying. "A half-point drop in mortgage rates can decrease a homebuyers' monthly payment substantially, making a mortgage more attractive than a lease. Meanwhile, rents are sticky in the short term. Because renters are locked into a lease, rents don't fluctuate like a stock price and adjust more gradually." He also adds that this is a short-term shift. "In the long run, as renters opt to buy there is less demand for rental units, which will pull rents down. At the same time, the increased demand for real estate will push up home prices. So we'll see the rent vs. buy equation rebalance over time."
Source: Redfin | TBWS
How Rates Move:
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways this morning. Last week the MBS market improved by +55bps. This was enough to move rates lower last week. We saw moderate rate volatility through the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to impact rates this week. 1) Stimulus, 2) Jobs, and 3) Coronavirus.
1) Stimulus: The two sides still appear to be far apart on the next round of stimulus with liability protection, and "helicopter money" for unemployed and state governments are the main points of contention. As long as this is "twisting in the wind", MBS will continue to perform well, but once there is an agreement (most likely an agreement for an agreement), you will see MBS sell-off from our current levels.
2) Jobs: We have a deluge of jobs related data this week, culminating with Big Jobs Friday. The markets expect the unemployment rate to fall into the 10s and Non-Farm Payrolls to show new job additions of 1.65M even though every week over 1.4M new jobless claims are filed in states.
3) Coronavirus: The world is dealing with what some areas are calling the 2nd wave, and some are calling it the 3rd wave. Regardless, it is evident that areas that were thought to be "through" with the virus, like Spain and China, are obviously not, as there's no immunity that lasts more than a month or two and nations that have emerged from lockdowns are simply seeing those very same people get infected again. Meanwhile, global totals are now over 18 million, with over 250K new cases globally each and every day. The latest round or lockdowns will continue to suppress any economic recovery type, which is positive for bonds.
The Fed: Here is this week's speaking schedule.
This Week's Potential Volatility: High
Rates slide lower as the coronavirus continues to hang over the markets. Rate markets will be paying close attention to the jobs data through the week and particularly on Friday. Look for rate volatility to be slightly elevated this week due to the influx of important economic data.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
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