Low interests and a waning pandemic could keep the refinance boom going and boost purchase markets in 2021.
The election is past and the pandemic will hopefully soon join it in the rearview mirror, but the residential mortgage boom that began in 2020 is showing no signs of letting up as we start 2021.
Interest rates are low, housing inventory is limited and the pandemic-inspired desire to move to suburbia – or at least larger living areas to accommodate remote work – is still very much driving buyers’ searches.
Moreover, Fannie Mae estimates that at least 60 percent of existing homeowners could still save 0.5 percent or more by refinancing, so the refi boom may continue, although not necessarily at the same fervent pace we experienced in 2020.
We also suspect that there are a good number of people who have held off either buying or selling homes because they were wary of open houses or having to move during a pandemic – choosing instead to stay put and limit their interactions. These buyers and sellers will be steadily entering the market over 2021 as the threat of the pandemic wanes.
This means that the demand for mortgages will likely continue throughout the first six months of 2021 – and perhaps longer, though it is hard to imagine that banks and mortgage brokers will see the same type of volume as in 2020.
Benefits of Technology
Given the convergence of these events, the mortgage industry is poised for another strong year. For us within the industry, it’s an opportunity to expand our sales and support staff and continue to focus on helping as many individuals and their families as possible realize the dream of homeownership in all communities, especially the region’s underserved communities.
It’s also another year to reap the benefits of investments made in new technologies – software and hardware that have dramatically improved the customer experience. We obviously didn’t know the pandemic would make these investments so critically helpful, but those of us in the industry who enabled laptop origination technology back in 2001 and paperless technology back in 2014 have benefited nonetheless. Meanwhile, those within the industry who have not embraced online application or underwriting technologies will have to play catch–up in 2021.
To appreciate where we are in early 2021, it’s important to remember where we were this time last year. Interest rates were much higher. COVID-19 was viewed as a distant overseas problem that few took as a serious threat to us here in the United States. Last year was supposed to be a continuation of 2019’s steady demand from buyers, supported by some refi activity. In short, a ho-hum, steady–as–she–goes mortgage environment.
That changed almost overnight last March. The uncertainty caused by the pandemic created a brief delay in the purchase market, but a refi boom was ushered in by the Federal Reserve’s decision to slash interest rates last spring. The purchase market then picked up in late spring, creating a flurry of activity among banks and brokers anxious to meet the demand by consumers looking to improve their overall financial situations.
Still Unknown
It is difficult to imagine any series of events that could trigger the type of drastic changes that we encountered early last year, but there are a few things to keep an eye on in the months ahead.
We still don’t know the long-term effect of the pandemic on working remotely. If employers seize the opportunity to reduce their overhead by maintaining a remote working environment, we may have even more people seeking larger living spaces.
We may also see a surge in home construction or remodeling, as people seek in-law style accommodations to separate living areas from remote work offices. That, in particular, would be a boost for community banks, which have deeper expertise in residential construction projects.
Ed McDonald
On the flip side, the forbearance period is coming to an end. What is going to happen to the people who were allowed to skip their mortgage payments due to hardships caused by the pandemic? Will they resume payments? Will they default? Will they sell?
I know how concerned all of us are for our friends and families who have been personally or financially impacted by the COVID-19 pandemic as they struggle to remain in their homes. As a fellow local mortgage servicer, I know how hard all our servicing folks are working day and night, providing these homeowners with emotional support along with relief options that they need to remain in their homes. Let’s keep our fingers crossed.
The mortgage business was a bright spot for the financial services industry in 2020. It’s hard to imagine matching that success in 2021, but few in the mortgage business would be surprised by anything after what we endured in 2020.
Ed McDonald is president of Salem Five Mortgage Co., a subsidiary of Salem Five Bank.
