Mortgage rates started declining at the end of last year, giving reason to believe that the U.S. housing market would regain its momentum. However, unaffordability continues to be high in the nation, and the lower rates have not yet managed to nudge the real estate sector – or help the overall economy.
When mortgage rates decrease, homebuyers can access less expensive loans and increase their borrowing power. This helps lift the housing market through increased property purchases. Real estate is also one of the most important markets influencing the economy. It stimulates employment in construction; incentivizes purchases such as furniture and appliances; and leads to different home-related services, such as landscaping, design, and others.
Even though mortgage rates decreased sharply in the U.S. beginning in November 2018, they have not yet sparked a boom.
Favorable Mortgage Rates
Historically speaking, interest rates in the U.S. are extremely low right now. By comparison, the rate for 30-year conventional mortgages has averaged 6.25% for the last three decades.
Bleak Housing Statistics
Housing stats have shown clear declines in recent years. Investments in residential structures, for instance, have decreased for six straight quarters. Existing home sales fell by 2% year-over-year, and sales of new homes have also remained well below their peak in 2017.
However, home prices continued to increase, although gains have also been curbed in previous months.
An Unaffordable Market
Since 2009, U.S. real estate market prices have surged by as much as 60%, while the level of earnings grew by only 24%. This has led to an extremely unaffordable housing market overall.
Given this broader context, experts say low mortgage rates are not enough to revive the housing market – at least not yet. John Sim, a JPMorgan Chase analyst, told the New York Times:
“At this point, they don’t matter as much as people think. Even at this current level of rates, it’s pretty unaffordable to most renters.”
More Time Needed
The reduced mortgage rates did improve the situation slightly. For example, for a $286,000 property (the median price of a single-family home in June), the new 3.75% rate decreased monthly mortgage payments by $160 – after a 20% down payment.
Applications to purchase homes and refinance mortgages have seen a slight uptick, but not anything remarkable. Experts believe more time is needed for the real estate market to adjust and respond to the favorable, new rates.
Reasons for Lackluster Response
The housing bust a decade ago seems to be partially to blame for this. Since 2008, home builders have been reluctant to invest in more affordable residential buildings, such as starter homes. This may come as no surprise: starter homes, although quite appealing to first-time homebuyers, are not very profitable for developers.
Banks did try to incentivize the purchase of pricier properties through more relaxed lending rules, but that didn’t help much, either. In the wake of the economic crisis, financial companies were pushed by regulators and mostly held on to stricter guidelines. As a result, homeownership decreased from an elevated level of 69% to 64%.
Lower mortgage rates have not yet been able to revive the U.S. housing market and stimulate the economy. But things may look up in the future. Given the country’s economic past, more time may provide the desired, positive results.