When there is no COVID-19, no war, no recession or other crisis about, loans for home purchases represent approximately 70% of the mortgage business, with refinances contributing the other 30%.
In the first quarter of 2020, as interest rates dipped, the tables flipped, with refinances constituting 70% of the business, says Hart Weatherford, executive vice president of Capstar Bank Mortgage.
Home loans began their comeback in May, accounting for about 50% of the loan volume by mid-May and ending the month at nearly 60% of the loans. June is even more promising, Weatherford says, with purchases accounting for 65% of the volume.
Those numbers are not reflected in recent closed sales, as last week’s were dismal compared to the last week of May in 2019. There were 233 closed sales in Davidson County last week with only five in the $1 million-plus category. There were more than twice as many – 468 closed sales, with 22 of $1 million or more – in May 2019.
“Rates are dancing between 2.75 and 3.125% for 30-year loans,” says Weatherford, ”and there is 15-year money in the mid-2% range.” With the onset of the virus, home sales slowed, but the rates dropped along with the jobs leaving those that were left employed able to take advantage of the low rates.
For years, lenders and Realtors alike have boasted of rates being at “historic lows,” and they were accurate in their assessment. But 30-year fixed rates at 3% or less are at even new historic lows. In the first quarter, those who had purchased in the past several years in the prehistoric low rates of 5% or higher rushed to refinance.
Even with unemployment hitting 20%, that left 80% employed – even higher in this area – causing a wave of refinances.
All this has spurred a new phenomenon, different from years past when interest rates dropped significantly.
Weatherford, a 22-year veteran in mortgage lending, says in past years borrowers opted to replace one 30-year mortgage with a lower 30-year mortgage, thereby reducing their monthly financial obligations. In the refinance surge in the first quarter of this year, most opted to reduce the rate along with the terms of the loans.
Weatherford says taking a loan from 30 years to 20 can leave payments at basically the same and carve 10 years of payments off the life of the loan.
On a $300,000 mortgage at 5%, for example, the payment would be $1,610 per month. At 3%, the payment would be $1,252, a savings of $345 per month. The 20-year mortgage would have a payment of $1,604, but for only 240 payments versus 360 payments.
The 360 payments at $1,610 total $579,600, and the 240 payments at $1,604 equals $384,960, a savings of $194,640. These examples are assuming borrowers retain the properties for the duration of the respective loans.
Contrary to what is reported in other real estate markets, Weatherford says millennials are buying properties in Nashville. With rates this low, it provides the youth of today an opportunity to dive into the market, buy residences at these low rates and when their conditions change and moves are in order, then lease the homes and in a few years have a free property.
There are numerous condominiums in the Vanderbilt area that rent for $2,250 a month for a two-bedroom unit. Last week, Vanderbilt eased their requirement for undergraduates living on campus. With thousands of students now able and certainly eager to live off campus, prices are on the rise.
With numerous colleges and universities in the area, the opportunities are high, even if the short-term rental market continues to lag.
While money is cheaper, it is not coming easier, especially for the self-employed. During a recent sale, Weatherford says, an underwriter required a real estate broker bring a check from her last closing in order to prove that she was still in business.
Those who have been furloughed are finding it easier to meet the underwriting guidelines than those who have been laid off from their jobs. Those in the restaurant and entertainment businesses are under great scrutiny.
In 1981, interest rates hit 18%. Thirty-nine years later, the rates are at less than 3%. They will not hit zero.
Richard Courtney is a licensed real estate broker with Fridrich and Clark Realty and can be reached at [email protected].