The rapid growth in housing demand and rising home prices are powerful incentives for homebuilders to ramp up production, which grew strongly in the fourth quarter. Strong growth in housing supply is one way for the market to absorb higher housing demand and reduce pressure on housing affordability. Single-family housing starts jumped another 18 percent during Q4’20 to a seasonally adjusted annual rate of 1.23 million units, the highest quarter since the fourth quarter of 2006. There is an important lesson here: single-family housing starts increased within one pandemic year the same amount as it did in the previous four years combined. It will be important to maintain that production as the economy emerges from the pandemic and refrain from returning to pre-pandemic levels.
As the U.S. economy emerges from the recession, one of the hurdles faced by potential first-time homebuyers is higher interest rates. For example, a mortgage rate of 3.4% (a 0.5 percentage point increase from December) would raise a monthly mortgage payment by around seven percent, and a mortgage rate of 3.9% (a one percentage point increase from December) would raise a monthly mortgage payment by around 14 percent. While the pandemic has increased the value many potential homebuyers place on homeownership, higher interest rates will likely tell us how much they are willing to pay.
Maintaining Access to Credit During the Housing Boom
The housing finance system continued to perform well during the fourth quarter to ensure access to credit for first-time homebuyers. The COVID-19 pandemic has stressed the housing finance system in three ways: more hurdles to buy and sell homes; tighter credit availability due to increased credit risk – both actual and perceived; and lack of mortgage industry capacity due to rising demand for refinancing. Credit availability for potential first-time homebuyers can be especially vulnerable since first-time homebuyers rely heavily on low-down payment mortgages for financing. The record number of first-time homebuyers suggests that the mortgage industry has been largely successful in maintaining access to credit. The mortgage industry has quickly and successfully shifted a large number of employees from the office to working from home by leveraging technology, which ensured that qualified borrowers can continue to access credit, while maintaining social distance protocols.
As a result, the real estate financing industry has been among a small number of industries that reported job growth since February. As of December, while overall payroll employment is down 6.5% from February, real estate finance sector employment is up 14 percent, and employment for mortgage and non-mortgage loan brokers is up 25 percent during the same period. For both segments, employment in December reached their highest levels since August 2007. By expanding its labor force, the mortgage industry was able to meet historical demand for mortgage credit for both home purchases and refinances. According to Inside Mortgage Finance, the industry originated a record $4 trillion of new loans.