There are many unique factors influencing mortgage rates in 2021, including Covid-19 lockdowns, economic growth, and inflation. Here’s what a broker team can expect.
Mortgage rates are constantly fluctuating, and their values not only have a significant impact on the long-term costs of purchasing property through financing but also the functionalities of broker teams and agents.
Borrowers with excellent credit histories are usually the only mortgage applicants who can take advantage of favorably low interest rates. Furthermore, while borrowers’ financial health undeniably plays a role in the interest rates they’re offered, economic factors and government policies considerably affect mortgage rates, too.
While there are various factors that affect mortgage rates, its constant fluctuation has an impact on brokerages and agents as well. Mortgage rates not only affect profit margins and agent commissions but they also determine how slow or fast a sale would be.
Let’s talk about the five key factors that affect mortgage rates and how they impact broker teams/brokerages.
Inflation causes a gradual and steady upward growth of prices. This trend is a crucial economic indicator and an important factor for all mortgage lenders. Inflation chips away at a fiat currency’s purchasing power over time, so mortgage lenders must keep interest rates at a level that will adequately overcome this weakening of purchasing power by inflation. Doing so ensures that they can continue to earn a stable net profit through their interest returns.
Let’s say mortgage rates are at 4%, but the level of annual inflation is currently at 2%. The actual return on a loan when considering the purchasing power of a currency would only be around 2%. Mortgage lenders must thus carefully track the rate of inflation and adjust their mortgage rates accordingly.
In a Mortgage Reports report, Khari Washington, a real estate and mortgage broker at 1st United Realty & Mortgage, Inc., predicts that 30-year mortgage rates will reach 2.875% in the US by late 2021. He also believes that 15-year mortgage rates will reach 2.375% by the same time. Washington says that the Federal Reserve’s easy money policy and economic strengthening will place mortgage rates in the upper range by the end of the year. Other respectable real estate experts predict that interest rates will rise as the economy begins to stabilize and inflation continues on an upward trajectory.
High inflation rates have the most potential to drive up mortgage rates this year. In the above-mentioned report, senior economist at the National Association of Realtors, Nadia Evangelou, highlighted how high inflation pushed mortgage rates up by almost 3.2% in March alone. Inflation also drives property value and price increases.
Impact on brokers:
This can reduce sales in the industry and strain real estate brokers and their team leaders, who will need to work harder to convince potential buyers to splash out on investment properties. Their commission percentages may also be diminished by inflation to a degree to keep houses affordable to the wider market.
2. Federal Reserve Monetary Policies
The US Federal Reserve Bank’s monetary policies strongly influence the American and world economies and interest rates, including those charged on mortgages.
The Federal Reserve doesn’t set interest rates itself, but its actions in adjusting money supplies create ripple effects that impact the interest rates available to borrowers. If the money supply increases, as it has been during the pandemic, downward pressure is exerted on mortgage rates, effectively lowering them as a result.
Impact on brokers:
Lower mortgage rates are great news for real estate brokers, as they increase buyers’ home-buying power. Brokers will be able to sell many more properties with favorable mortgage repayment rates during times when mortgage rates have been lowered and enjoy better commission earnings in the process. Team leaders may also find it easier to motivate their teams during times of relative financial strength in the industry, although healthy competition between agencies may be diminished to a degree due to the abundance of properties on the market.
3. Economic Growth Rates
Economic growth indicators like the gross domestic product and employment rates strongly influence mortgage rates. The Covid-19 pandemic has negatively affected economic growth globally, and this trend has continued well into 2021.
Amid stagnant economies, wages and employment rates have dropped, leading to a general decrease in the demand for home loans. This has placed downward pressure on the mortgage interest rates that lenders can realistically offer.
Conversely, easing coronavirus lockdowns and an increase in vaccinations will begin to boost mortgage rates towards the end of the year. The Federal Reserve’s quantitative easing and a rise in bank demand for MBSs could provide some respite to soften interest rate increases.
Impact on brokers:
Wondering how real estate brokers might gain from this? Well, the rising costs of rentals due to inflation may prompt many potential investment buyers to start looking at buying additional properties at this time in order to capitalize. Real estate brokers can expect to make big-ticket investment property sales through this!
4. Conditions in the Housing Market
Housing market trends affect mortgage rates in several important ways. Declines in home purchasing can decrease the demand for mortgages, which pushes interest rates down.
In 2021, an increasing number of would-be borrowers choose to rent homes rather than purchase them due to increased economic pressure. Renting tends to be cheaper than buying, as maintenance, property taxes, and insurance against fire, flood, theft, and other incidents are all covered by the property owner. The upswing in the rental market has applied downward pressure to interest rates, making them more favorable for individuals who can afford to take out a mortgage on real estate purchases.
Impact on brokers:
Cash-out financing is becoming increasingly popular, as increasing home values and low rates generate opportunities for property owners to cash out their home equities. The aforementioned downward pressure on mortgage rates will again make it easier for real estate agents and team leaders to convince potential buyers to make their moves, resulting in higher profit margins and individual commission earnings.
5. The Bond Market
Investment firms and financial institutions offer mortgage-backed securities as investment opportunities. The interest from these debt securities needs to be at a certain level to attract investors. If investors are hesitant at any given time, this can place significant downward pressure on the abilities of real estate brokers to make sales.
The general condition of the bond market, as a whole, affects the prices of mortgages, as lenders have to generate sufficient MBS yields to keep them competitive within the debt security market.
Mortgage lenders use bond benchmarks like the 10-Year Treasury bond yield to adjust their mortgage interest rates. MBSs must usually offer higher yields, as repayment is not entirely guaranteed as it would be with government bonds. In theory, the available BB and BBB yield in the bond market influences investors’ demands and expectations of their real estate investments.
Impact on brokers:
For real estate brokers, this means that a strong bond economy will improve real estate prices, and thus their profits. A weakening bond market will cause investors to hold back and lead to slow sale rates in the industry, at least until the interest from debt securities reaches its threshold again.
Lower available interest rates benefit real estate brokers in many ways as well, encouraging more mortgaged sales in the property industry and keeping their profit margins stable.
At the time of writing, rates for 30 and 15-year fixed-rate mortgages average around 2.95% and 2.24%, respectively. These are attractive figures for borrowers, as they are close to historic lows. This trend has enabled first-time homebuyers to take advantage of excellent, low mortgage interest rates. According to the latest industry predictions, other buyers will be able to do so well into 2021, too.
However, it’s crucial to note that mortgage rates are very unlikely to continue dropping throughout 2021 and into 2022. In fact, most experts believe that rates will either remain the same or increase into the high 3% range over the next two quarters.
Mortgage interest rates are closely aligned with the core rules of supply and demand. Factors like economic growth and stagnation, inflation, changing monetary policies, and the state of the housing and bond markets all affect the mortgage rates that real estate buyers will pay.
It’s important to remember that borrowers’ financial health will also affect the interest rates they can obtain. The healthier you keep your credit rating, the lower your mortgage interest rates will be.
Written By Marina Copeland
"As an editor, Marina covers a range of topics, including real estate and financial topics. She brings years of experience to delivering content that inspires and educates others."