2021 Mortgage Rates and What’s Influencing Them

Early 2021 mortgage rates have hovered around record lows, despite an abundance of economic news. After the close of 2020, uncertain times continued into 2021.

On the political front, the elections ended. Democrats took control of the House, Senate, and Presidency.

Meanwhile, the COVID-19 pandemic continued its spread throughout the country. Much remains in flux, particularly with the alleged upcoming stimulus package and coronavirus vaccine rollout.

Overall, there are numerous trending topics influencing mortgage rates in the first quarter of the new year.

Election Results Impact on 2021 Mortgage Rates

As mentioned, the Democratic Party won both Senate seats in the runoff election in Georgia. This gave them control of both the Senate and the House of Representatives. Top priorities feature a large stimulus package, debt relief, and a higher minimum wage.

Investors expect that this will lead to increased government spending. Thus, the Fed will need to issue additional bonds to fund the spending. As a result, this will push bond yields higher.

Update on 2021 Mortgage Rates and the Housing Market

Record-low mortgage rates from last year remain largely intact heading into 2021. However, there was a slight increase in the first few months of the new year. Experts are predicting continued low rates for the remainder of 2021.

Mortgage Rates Slightly Increase

The Democratic sweep in the Georgia Senate runoff election negatively affected 2021 mortgage rates. Meanwhile, the labor market report showed mixed results. With other economic data coming in strong, mortgage rates saw a negative impact overall. Ultimately, rates rose a little, but remain near record-low levels, roughly a full point lower than a year ago.

That said, a wide range of major economic news caused some volatility for mortgage rates. The net effects of a proposed new stimulus package, Fed speeches, and disappointing consumer spending data were roughly offsetting, and mortgage rates ended with little change.

Despite the mild fluctuation, it was a relatively uneventful beginning for 2021 mortgage markets.

Housing Market Continues to Rebound

The housing sector continues its spectacular rebound. After a gloomy spring, existing-home sales unexpectedly increased from November and were 22% higher than a year ago, their highest rate in 14 years. In December 2020, they continued their rise December by 0.7%.

Looking at the full year, 2020 saw the strongest sales pace since 2006. Millennials made up the largest share of home buyers at 38% of the market.

The median existing-home price was 13% higher than a year ago and the median household income of first-time home buyers was also up to $80,000 from $68,000 in 2019.

Inventory Levels Predicted to Rise in 2021

Inventory levels, however, were down 23% from a year ago to record-lows. They subsequently remained the primary obstacle to even stronger sales activity.

The number of homes for sale was at just a 1.9-month supply nationally. This is well below the 6.0-month supply, which is considered a healthy balance between buyers and sellers.

Encouragingly, a report on housing starts contained more optimistic news. In December, single-family housing starts unexpectedly rose 12% from November and were 28% higher than a year ago. This was the eighth straight month of gains.

Similarly, single-family building permits, a leading indicator of future construction, increased 8% from November and were 30% higher than a year ago.

U.S. home affordability took a hit as median home prices were up nearly 10% in most parts of the country. This is expected to stay the trend as 2021, according to Realtor.com, looks to be a ‘sellers’ market’ with high home prices and strong buyer competition for few homes. Home prices could rise to 5.7% this year.

Predicting the 2021 Housing Market

Predicting an increase in demand, many experts are anticipating a strong start for the housing market in 2021 and continued growth later in the year.

The National Association of Realtors predicts that new-home sales will rise 21% in 2021 with existing-home sales also rising 9%. Most of this estimation is spawned by recent trends causing people to move away from city centers and into suburbs. This generally entails remote workers, those seeking relief from high rent, and those wanting a larger living space.

The NAR also predicts that 2021 mortgage rates will rise to around 3.1% by the end of the year.

European Central Bank Makes No Changes

The European Central Bank (ECB) made no policy changes and repeated that its massive bond purchase program will run until at least March 2022.

The meeting statement said that the ECB “decided to reconfirm its very accommodative monetary policy stance.”

Retail Sales Fall Amid Pandemic and Stalled Stimulus

Following sharp declines in the spring due to the pandemic, consumer spending bounced back remarkably quickly to reach record levels. However, rising COVID-19 case counts have since caused three straight months of declines.

In December, retail sales dropped 0.7% from November, and the November results were revised lower. Retail sales fell an additional 1.9% last month.

The Department of Commerce has stated that they expect growth in this area leading up to the summer months. In addition, the coronavirus vaccine becoming publicly available could also help retail sales.

The reduced economic activity resulting from the pandemic has caused a decline in inflation, and the latest report confirmed that current levels remain low. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In December, core CPI was just 1.6% higher than a year ago, the same annual rate of increase as last month.

President Biden’s Proposed Stimulus Package

A wide range of major economic news caused some volatility for mortgage rates. However, the net effects of a proposed new stimulus package, Fed speeches, and disappointing consumer spending data were roughly offsetting, and mortgage rates ended with little change.

President Biden released the details of a $1.9 trillion coronavirus rescue package intended to assist households and businesses during the pandemic. There is still more to discuss among Democrats and Republicans who hold opposing views on what should and should not be included in the package, delaying the package and prolonging the continued decline of spending by most Americans.

One of the most-discussed aspects of President Biden’s relief package is a raise of the minimum wage to $15 which Republicans have criticized.

Some other elements of the proposal include additional direct payments of $1,400 to most Americans, increasing unemployment benefits, and extending eviction and foreclosure moratoriums until the end of September. This is expected to boost the 2021 economy.

If passed, the Fed will issue additional bonds to fund spending. The stimulus plan discussion negatively impacted 2021 mortgage rates, ultimately.

Job Loss Returns in New Report

A key Employment report from the Bureau of Labor Statistics contained mixed results. In December, the economy lost 140,000 jobs, below the consensus forecast for an increase of 75,000, and the first monthly decline since the unprecedented job losses in March and April caused by the partial shutdown of the economy. Hospitality was easily the hardest hit sector.

The other major areas of the report contained more optimistic news. Expected to rise to 6.8%, the unemployment rate stayed flat at 6.7%. Average hourly earnings, an indicator of wage growth, rose 0.8% from November, far above the consensus for an increase of just 0.2%, and were an impressive 5.1% higher than a year ago.

According to the Congressional Budget Office, a nonpartisan government group, the US unemployment rate will not return to pre-pandemic levels (around 3.5%) this decade. Their analysis suggests that many job seekers could struggle to find work even after mass vaccinations and the ‘end’ of the COVID pandemic. Though they project that the unemployment rate will drop over time—down to 5.7% this year and 5% next—it’s predicted that it will hover around 4.7% from 2026 to 2031.

Most of this unemployment is impacting those in bottom-wage jobs who are experiencing depression-era unemployment rates of around 20% in comparison to 5% for higher earners. It is still unknown how the President’s potential $1.9 trillion stimulus plan could affect these numbers.

The Fed Speaks Out on Inflation and Economic Progress

Several Fed official’s basic message was consistent this past month. As was stated in the most recent policy statement, officials plan to keep an accommodative stance until there is “substantial further progress” toward their employment and inflation goals.

According to Chair Powell, raising the federal funds rate will not take place any time soon. Essentially, there will be no reason to tighten monetary policy unless inflation rises substantially “in ways that are unwelcome.”

For mortgage markets, concerns about the spread of variant strains of COVID roughly offset stronger than expected inflation data.

Pandemic Causes Decline in Inflation Affecting 2021 Mortgage Rates

The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has been one of the factors responsible for record-low mortgage rates.

However, investors are now concerned that the trend may have reversed, and inflation may be heading higher. An analysis by BCA Research says inflation could increase modestly over the next few years before spiking sometime in the middle of the decade and it could rise quickly in the next few months.

In December, the core PCE price index was 1.5% higher than a year ago. This was well above the consensus forecast. Also, it was up from the annual rate of increase of 1.4% last month.

After enormous swings due to the pandemic, gross domestic product (GDP), the broadest measure of economic activity, appears to be returning to more normal growth levels. GDP declined a stunning 31% annualized during the second quarter of 2020 and then increased at a comparable rate of 33% annualized during the third quarter.

By contrast, fourth-quarter GDP growth was 4.3% annualized, which was close to expectations, and more in line with historical readings.

As expected, the Fed made no changes in the federal funds rate or its massive bond purchase program. Also, they offered a remarkably similar meeting statement.

Officials noted that after a “sharp rebound” in economic activity over the summer, growth has “moderated in recent months.” They did not provide additional guidance on future bond purchases. Essentially, the Fed will continue its accommodative monetary policy until achieving unemployment and inflation goals.

Looking Ahead After Initial 2021 Mortgage Rates

Though the latest reports brought back negative numbers on job loss and retail spending, there were still signs of potential growth in the housing market. These offer reasons to anticipate positive economic changes on the horizon.

As the vaccine is more readily available and stimulus money reaches the public, spending could rise. This can lift the economy with it.


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