Colorado Springs saw near-historic lows in mortgage interest rates last year, and local lenders are predicting more of the same in 2020 — though the presidential election is likely to cause stagnation in the mortgage bond market.
Back in November 2018, lenders “were seeing some of the highest interest rates we’ve seen in several years,” said John Haney, president of Colorado Mortgage Company. But rates have dropped since then.
“Today we’re about three-quarters of a percent better in interest rates [compared with] a year ago,” Haney said. “We fully expect that interest rates are going to remain low this year. And if I had to give you my best educated opinion of what rates are going to do, we should see probably no more than a half- to three-quarters of a percent swing in interest rates either up or down. Rates are going to trend sideways, and we’ll have little peaks and valleys along the way.”
The Springs residential real estate market has been robust over the past couple of years, with high demand for housing and low inventory driving up purchase prices and triggering significant home value appreciation.
Even with the high purchase demand, Haney said the low rates mean it’s an ideal time to purchase a home or refinance the terms on an existing loan.
With rates dropping so low over the past year, Haney said, “we actually have a refinance boom inside of a purchase market, which is not normal.
“Normally there’s a refinance boom, which means interest rates are low and less people are buying,” he said. “But we actually have a ton of purchase demand, and also a ton of refinance demand.”
Tim Coutts, president of CB&T Mortgage, said his projection for the market is much the same as Haney’s.
“Overall, rates are very competitive, relative to the last few years,” Coutts said. “It’s been a good market and I think what you will see in 2020 will look a lot like 2019. I think we’ll be around 4 percent [interest] in 30-year [conventional fixed-rate mortgage] money in 2020.”
For 2020, the presidential election is expected to have the greatest impact on the market.
In election years, Haney said, many who would typically invest in mortgage-backed securities — the primary driver of interest rates — tend to delay investing until they know who’ll be president for the next four years.
“It doesn’t matter who wins, half the country’s going to be upset with the results,” Haney said. “There’s going to be a lot of people sitting on the sidelines with their money, or making decisions when it comes to investing in mortgage bonds, which is the No. 1 reason why rates go up and down.
“So a lot of big money is probably going to be just sitting more idle this year than in previous years because of the unknown of what happens during the election.”
Also, during an election year, the Federal Reserve — which determines the federal funds rate that generally impacts short-term and variable interest rates for banks — is likely to refrain from adjusting rates.
“The Fed tends to stay out of it unless forced to make rate moves,” Coutts said. “They like to see themselves as independent and on the sidelines, so they will tend to stay out of changing rates a great deal in an election year. They could be forced to it, but I don’t see anything that really will force them to play a hand in increasing or decreasing rates at this point in time.”
POLICY, REGULATION CHANGES
In September 2019, the Trump administration released a formal plan to remove the mortgage loan companies Fannie Mae and Freddie Mac from government conservatorship.
They were placed under public control in response to the 2008 financial crisis, but the Trump administration plan — which could be implemented in 2020, but might take longer — would reprivatize them.
Haney said reprivatizing would likely cause interest rates to drop even further by eliminating the guarantee fees (or g-fees, which ensure Fannie Mae and Freddie Mac’s payment of principal and interest on mortgage-backed securities), and charging a fee for providing that guarantee.
“That g-fee means that mortgages today, on average, cost half-a-percent higher than they should,” Haney said, “because the g-fee is what’s going to the government to help with this whole bailout process.
“So for consumers, it would be very good for Fannie and Freddie to get back to a privatized environment, because now the g-fee is going to go away, which means that we should experience a lower cost of borrowing overall.”
Another federal change that Haney said should have a significant impact on the mortgage market in Colorado Springs is the Blue Water Navy Act, signed into law in 2019.
The act included changes to the VA Home Loan Program, particularly the removal of county loan limits.
“Here in Colorado Springs, we have a plethora of veterans … and this new legislation change has now removed a loan cap for veterans,” he said. “So if a veteran, prior to this change, wanted to get 100 percent financing, which is what the VA offers, they were capped at what our limit was for our county — which means they could only get 100 percent financing on what at the time was a cap of $484,000.
“But now that cap has been removed. If they want to get 100 percent financing on a home — let’s say that’s $600,000 or $700,000 — they now can get full, 100 percent financing. So that’s a really big change we’ve seen.”
WHAT ABOUT RECESSION?
A recession would also impact local housing and mortgage markets — and Haney said it’s “less a matter of if, and more a matter of when.”
But even if recession hits, its impact on the real estate market might not be as drastic as some might expect, he said.
“I don’t see a bubble in housing or real estate, because all the fundamentals are strong,” Haney said. “Our unemployment rate in Colorado Springs is super low, even compared nationally. Our median household income continues to rise, and that is rising at a pace that can sustain a good, healthy appreciation in the real estate market.
“So we might be seeing a 5- to 7-percent appreciation in real estate, and maybe only a 1- to 3-percent increase in median household income. But a 1 percent increase is more than enough to make up for the difference in the household appreciation rate.”
In many past recessions, Haney said, real estate prices have actually fared well, with the only exceptions being the two greatest financial crises in U.S. history.
“Not every recession is like the Great Recession,” Haney said. “Every recession between the Great Depression and the Great Recession, real estate has done well. So I think real estate is going to continue to do very well, even when we have another recession.”