December 11, 2020

The bottom line:

Rising home prices are helping drive the biggest gains in home equity since 2014, offering homeowners more financial flexibility and protection against further economic downturns. Price appreciation has also pulled 370,000 borrowers out of negative equity since the third quarter of 2019 and contributed to a steadily rising confidence amongst would-be home sellers. Buying conditions remain solid, as mortgage rates hold near record lows and lenders begin to ease borrowing conditions for the first time since the pandemic began.

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Homeowners are building equity at the fastest pace in six years

The housing market has been one of the economy’s true silver linings in 2020, and its enduring strength has padded homeowner balance sheets to the tune of trillions of dollars in equity. From September 2019 through September 2020, homeowners with mortgages collectively gained $1 trillion in home equity, according to CoreLogic. On a per-mortgage basis, that amounts to an annual gain of $17,000 – the highest one-year increase in six years, a remarkable feat considering how strong home value growth has been at other times over the past few years. Washington State homeowners realized larger average equity gains in the past twelve months – a per-household increase of just under $36,000 – than those in any other state, though homeowners in California, Massachusetts, Idaho and Arizona also realized big gains. Nationally, about 1.6 million mortgages (or about 3% of all loans) were in negative equity in Q3 – in other words, owing more on their loan than their house is worth – down 18.3% from Q3 2019. With strong home value appreciation unlikely to weaken, these positive developments seem likely to continue. According to the report, if home prices increase another 5%, another 247,000 homes would emerge from negative equity.

Mortgage rates are holding firm despite bond market movements, and lenders are easing requirements

Progress towards a new round of fiscal stimulus and more encouraging developments regarding a COVID-19 vaccine have pushed bond yields higher in recent weeks. But the upward movements in mortgage rates that would normally accompany such a shift have, thus far, not occurred. In fact, mortgage rates fell this week and now sit just above their all-time lowest levels — an unorthodox trend that can be partially attributed to the enduring demand for housing and home loans. Falling mortgage interest rates have prompted a surge in borrower demand and lenders are, in many cases, keeping rates elevated in order to stem the tide. While this means that mortgage rates aren’t as low as financial markets indicate they should be, it also means that they are less likely to rise when bond yields begin to ascend as they have done recently. Absent a monumental shift in the economic outlook – for instance, if a much larger-than-expected fiscal relief package is passed – mortgage rates are unlikely to head meaningfully higher anytime soon. It also appears that mortgage lenders’ appetite for risk has recently increased. The MBA’s Mortgage Credit Availability Index – a gauge of how tight mortgage lending standards are – loosened in November for the first time since the pandemic began. This adjustment should make it easier to secure a loan for those seeking unconventional financing or hoping to make smaller down payments.

Seller confidence is rising on expectations for future price growth, even as the coronavirus surges and job market uncertainty remains elevated

Fannie Mae’s housing sentiment data suggests that while recently rising COVID-19 case volumes may be dampening the outlook, people are still eager to buy and sell homes. Almost three-fifths of the survey’s most-recent respondents said it was a good time to buy a home, down slightly from October but still in line with average rates from the years leading up to the pandemic. A similar share of respondents (59%) said it was a good time to sell a home. Seller sentiment tanked in the early days of the pandemic, and the share who believe it is a good time to sell remains 7 percentage points below last year’s level, but that level has consistently risen recently — potentially on the strength of budding optimism that home prices will continue to rise. The net share of respondents who said they believe home prices will rise in the next year – the share who think they will rise minus the share that think they will fall or stay the same – jumped 8 percentage points in November from October.

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