How Mortgage Rates Could Affect the Markets in 2020

Donald Arace | November 2019

Donald Arace

With the year rapidly moving towards the close of what has evolved into a surprisingly successful real estate season, we should take a moment to reflect on the 2019 mortgage finance market and its effect on activity, and what is to come for 2020.

Last November (2018) you may recall, interest rates were hovering close to 5% for 30-year fixed rates. Based on 2017 tax (cut) law initiated by federal government, the general consensus was that the economy was going to increase GDP growth fueled by increased take home dollars for taxpayers, as well as corporate tax cuts. It was thought these inflation drivers would push long-term mortgage rates even higher.

Bear in mind with higher rates comes the downside effects of higher monthly mortgage payments, which can affect potential border line buyers and squeeze a healthy chunk of the market.

This theory did not come to pass, but instead a few events occurred that derailed the rising interest rate environment. Although unemployment did decrease to its current rate of approximately 3.6% as of the writing of this article, GDP has stalled in the general economy to this past quarter’s rate of 1.9%.

There has been absolutely no inflation. The trade war with China and its uncertainty have caused corporations to deleverage rather than to invest in manufacturing pending the outcome. This past year we seen rates decrease dramatically to as low as the low 3’s for 30-year fixed rate mortgages. This not only continued to spur on a buyers’ market in real estate, it also brought about an unexpected refinance boom that deleveraged many homeowners, increased speculation in real estate and fueled construction business and renovations. This is what provided the fuel necessary to propel the real estate sales market to another year’s success. In recent week(s) rates have risen with the strong third quarter earnings on Wall Street, but it is hard to say if this is a trend or a blip in the up and down cycle.

The Mortgage Bankers Association Forecast for 2020 predicts a continued low interest-rate environment for the foreseeable future. Unemployment will continue to be a key factor to a healthy market. Politics aside, which could be a dark horse issue, the major markets see a minor drop off in real estate due to saturation of nine-year bull market. However, it is probably as important to see what will be the result of the U.S. – China negotiations and its impact on the overall market and consumer confidence. A breakthrough in U.S.-China negotiations could be a boom for the stock market and overall economy and subsequently send rates higher.
As to the mortgage products updates, there have been a few major developments that should and could help our local markets.

As of October 15, The Federal Housing Administration has announced they have modified their condominium guidelines making it easier for buyers to qualify for FHA mortgages. Currently FHA can only be used on FHA-approved condominiums. With the new spot loan program, it is estimated to increase the number of FHA loans provided to potential buyers. The FHA is anticipating an increase of three times present levels.

As the years pass since the Financial Crisis of 2008, a slow rollout of Non-QM lending programs for self-employed borrowers properties have filtered into the market place. Self Employed Bank Statement Programs and new No-income programs that require a reasonable down payment, excellent credit and multiple months reserves after closing are available. In addition, upgraded 2-4 family investor rental property products should continue to increase.

First Time home buyers are still a growing market as younger couples come to market. Generation Y is firmly entrenched as one of the main drivers. Generation Z will be coming of age in the next four years. With low unemployment, home sale prices leveling off, increased rental costs and low interest rates still available, first-time home buyers will be a continued force within the real estate market.

In closing, the real estate industry will go as far as the interest rate market will allow. For every 1% increase in rates assume a 10%- 15% drop in qualified borrowers and lower sales prices.

Here’s wishing all a very happy and healthy upcoming Holiday season.

Donald Arace
Donald Arace has been in the mortgage industry more than 30 years. He is vice president of loan originations for Hudson United Mortgage Westchester, which is based in Elmsford.