Mortgage rates fell slightly this week as mortgage applications decreased. Specifically, the 30-year fixed mortgage rate dropped to 2.77% from 2.79% the previous week. With a new stimulus package a top priority of the new administration, which will give relief to millions of households and businesses, expect mortgage rates to rise modestly in the following weeks. However, mortgage rates will continue to be historically low. NAR is forecasting the 30-year fixed rate to average 3.0% for the first half of the year.
On the data front, although fewer people applied for unemployment benefits last week, jobless claims remained elevated, putting downward pressure on mortgage rates. As the new administration plans to ramp up COVID-19 vaccinations and as economies reopen, expect a stronger recovery for the job market later this year.
Furthermore, very strong gains in building permits and housing starts show a housing market that is still robust. Specifically, housing starts rose 5.2% while building permits increased 17.3% in December compared to a year earlier. These new homes are needed more than ever to ease the gap between housing demand and supply. NAR estimates that it would take a record low 2.3 months to exhaust the current inventory instead of a 6-month supply which is considered as a healthy balance between supply and demand. In the meantime, housing demand is expected to be even stronger later this year as mortgage rates will continue to be at historical lows and as economies reopen. The proposed tax credit of $15,000 for first-time homebuyers from the new administration in combination with the favorable demographic trends could boost further housing demand in 2021. However, homebuilders report that rising material costs, limited lot supplies, restrictive zoning laws, and a skilled labor shortage are making it harder to operate at full capacity. Thus, by loosening some of these constraints, homebuilders would be able to deliver more homes. Furthermore, as people are moving to suburbs and smaller cities during the pandemic1, homebuilders may be able to build more affordable homes in these areas with higher land availability.