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Mortgage rates remained unchanged at 2.73% for the second straight week as recent data shows that inflation remains subdued well below the Federal Reserve’s 2.0% core target. Although inflation doesn’t have a direct impact on mortgage rates, rising inflation could lead to higher bond yields. Given that the 10-year Treasury yield is the basis for mortgage rates, this also translates into higher mortgage rates.
Both employment and inflation are expected to pick up later this year. On the jobs front, layoffs continue to drop, a sign that the worst months for the labor market could be behind us. As the COVID-19 vaccine becomes available to more Americans and the latest stimulus package is on track to arrive sometime soon, the re-opening of businesses will likely put upward pressure to prices. Therefore, mortgage rates will also rise, but only slightly. NAR is forecasting the 30-year mortgage rate to average 3.0% for the first half of 2021.
In the meantime, the Census recently estimated that nearly 2.3 million people moved during the pandemic because they wanted to buy a home instead of renting. This is an increase of 350,000 movers compared to a year earlier. As demand for rental homes seems to be falling off, rents are rising at a slower pace, according to the latest CPI release. Indeed, the current ultra-low mortgage rates make homebuying more attractive to renters. NAR estimates that 42% of renters can afford to buy the typical home. Thus, expect homebuying activity to increase further later this year. NAR is forecasting home sales activity to rise around 15% in 2021.
On the supply side, lumber prices continue to soar, creating additional hurdles to homebuilders to deliver more homes to the market. The Producer Price Index (PPI), which tracks the U.S. lumber and other construction material costs, shows that domestic lumber prices increased more than 40% in December compared to April 2020. This commodity is surging against a backdrop of continuing scarce supply amid robust demand for housing and renovations. Meanwhile, record-low borrowing rates exacerbate the effect of demand-supply imbalance on lumber prices as they boost further homebuying and homebuilding activity.
