There’s no doubt, COVID-19 changed the world in countless ways and took us all by surprise. From an economic standpoint, countless industries were shaken and disrupted. The United States experienced one of the worst economic hardships the country has ever seen. What exactly did COVID-19 do to the mortgage industry, and what’s to come in the future?
At A High Level
Despite the economic uncertainty, the mortgage and real estate market began to soar in 2020 and the powerful upward trajectory continued into 2021. What were the driving forces behind this powerful movement? Also, why did so many people decide to buy a house during the coronavirus pandemic?
There are many variables and layers to unpack in order to understand exactly what happened. These variables can be summarized and categorized into 3 main sections:
Fear: A great deal of fear and uncertainty is associated with the COVID-19 pandemic. This fear ignited a catalyst - people began to leave cities in search of the suburbs as the city was perceived to be the most risky. Relying on public transportation in populated urban areas certainly strays from the advice health experts were encouraging everyone to take to combat this virus.
Ability: Companies transitioned to a working from home culture, while simultaneously schools adapted to remote learning. Instead of one's home or apartment being unoccupied for the majority of the day, the entire family was home trying to get their work done. The lack of space and privacy presented challenges, and families tried to fix those challenges by moving to a larger home with more space.
Finance: Although the economy has a tremendous amount of uncertainty, it was in many people’s financial best interest to purchase a home. Not only does real estate provide less volatility compared to the stock market, the cost to borrow money was also reduced - which we’ll be covering in greater detail below.
Mortgage rates, also known as interest rate, is the fee a lender charges for borrowing their money. When one obtains a mortgage, not only is the borrower obligated to pay back the principal balance, they are also obligated to pay back the interest expense.
The higher the interest expense, the more money the borrower has to pay back. The lower the interest expense, the less money the borrower will pay back.
There are various reasons why the federal government lowers interest rates, but at the top of that list is to stimulate economic growth. When the cost of borrowing money is reduced, you’re essentially getting that money ‘on sale’, which encourages more people to borrow and spend. In return, this spending keeps millions of people employed and aids in stabilizing the economy.
According to Freddiemac, the average interest rate on a 30-year fixed rate mortgage went from a 4.46% rate in January of 2019 to 2.74% interest rate in January of 2021. Although that savings looks small, over the lifetime of the loan, this savings adds up!
Here’s a side by side example of how this rate change would impact your monthly mortgage payment.
|January 2019||January 2021|
As shown above, the borrower would have saved $231 if they were above to finance their home with a 2.74% interest rate instead of a 4.46%. This additional savings can be seen as one driving factor that exacerbated home buyers' desire to buy. So, it can be understood that mortgages issued during COVID-19 saved the borrower quite a bit of money because these mortgages were issued with a lower interest rate.
How Coronavirus Affects Housing Supply & Demand
Once you combine the three main variables; fear, ability, and financial, we land on the most foundational economic concept of all - supply and demand. Without question, supply and demand propelled the change in the real estate and mortgage industry. As more people were looking for homes, supply became scarce. This drove home prices higher and higher, ultimately making it easier for a homeowner to part ways with their property and move into another home.
Not only were homeowners getting more for their home when they decided to sell it, the borrower was also borrowing money at a reduced rate.
Following the interest rate example we viewed above, an interest rate of 2.74% saves you quite a bit of money compared to an interest rate of 4.46%. People who previously purchased their home with a higher interest rate decided to refinance their property to reap the benefits. Refinancing your property does not mean you sell your home to someone else. Instead, you simply sell your current mortgage to a lender, who issues you a new mortgage with a lower rate. This lower rate can help keep hundreds, or thousands, of dollars in your pocket each year.
Although the coronavirus pandemic created a surge in the housing and mortgage industry, this surge came with revisiting the loan standards lenders have. Lenders are only able to lend a certain percentage of their assets. If more and more people are applying for loans, lenders cannot part ways with their entire asset base to satisfy all requests. As a result, some standards are increased to control how much lending a lender actually does.
Borrowers had to meet higher financial standards when they requested a mortgage in 2020 as compared to previous years. One's credit score and debt-to-income ratio was put under an even more watchful eye, and lenders developed a new standard of what they’d accept before issuing the loan.
Mortgages: What Does 2022 Have in Store?
Data and forecasts suggest the housing market will continue to be incredibly competitive throughout 2022. As the country still battles the COVID-19 pandemic, and people continue to leave the city and rely less on public transportation, more and more folks will be flocking to the suburbs. Some companies have adapted a ‘you can stay remote’ concept, which gives employees more freedom and flexibility to live where they choose.
This page last updated: September 14, 2022