There may be hope coming for desperate first-time homebuyers in the form of historically low mortgage rates.
The interest rate on standard 30-year mortgages has sunk and is approaching an all-time low according to Nishu Sood and Rob Hansen at Deutsche Bank, which could open up the market to first-time homebuyers that have so far been unable to tap into the housing recovery.
According to a note from the research analysts Wednesday, there are a few reasons to believe that much like the drop in mortgages in late 2012 and early 2013, a new record could be set for mortgage rates. For one thing, bond rates are falling.
“First, there are structural macro factors (e.g. low rates abroad) pressuring US rates,” wrote the analysts. “These are reflected in Deutsche Bank’s fixed income team’s central forecast for a 1.25% 10-year yield in the second half of 2016.”
Additionally, mortgage rates are based on the 7-year bond yield, but current rates are higher relative to this benchmark than historical norms.
“The post-crisis range has been roughly 180-230 basis points,” said the note. “Based on last-week’s reported mortgage rate of 3.41%, the current spread is 221 basis points, near the high end of the post-crisis range.”
Thus, Sood and Hansen believe that mortgage rates will eventually fall to close the gap between the two rates.
These conditions are incredibly similar to the last time that mortgage rates hit a record low in 2012, said the note, but the beneficiaries last time were those that were trading up their houses. Instead of a boon for the high-end of the market, Sood and Hansen predict an influx of new buyers.
The biggest difference this time around is that credit is easier to access. In 2012, access to a mortgage was restricted only to those with good credit ratings, so younger people that make up the bulk of first-time buyers probably found it harder to get a mortgage, according to the analysts. Additionally, these first-time buyers were not seeing wage growth that would allow them to save up for a house.
With credit conditions looser nowadays and wage growth at a post-recession high, these new buyers can access the mortgage market and get into homes. Additionally, most upper-end buyers are in the “7th/8th inning of recovery” according to Sood and Hansen, since much of these higher-income brackets have experienced much of the economic improvement they will gain in this cycle.
There are still problems, such as the looming under-supply of these first-time homes, but the Deutsche Bank analysts believe that as demand increases so too will the builders’ supply.
While the analysts may be just hand-waving a legitimate supply issue, there is some evidence that homebuilders are aware of the under-building issue and could be addressing it as Sood and Hansen believe.
Regardless, it is apparent that mortgages are going to be cheap. It just remains to be seen if buyers take advantage.