Mortgage Rates in 2021: A Year in Review

Mortgage rates in 2021 were a wild ride. The average 30-year fixed mortgage rate started the year at around 3.11%.

Throughout the year, the Federal Reserve kept interest rates low, which helped keep mortgage rates in check. This was good news for homebuyers and refinancers.

In January 2021, the 30-year fixed mortgage rate was at its lowest point for the year, at 2.96%. This was a great opportunity for those looking to refinance their mortgage and save money on interest payments.

The mortgage rate landscape remained relatively stable, with some fluctuations, for the rest of the year.

A different take: What Were Mortgage Rates in 2021

The relationship between mortgage rates and house prices is complex, but research provides some valuable insights. A 1 percentage point drop in the mortgage rate can lead to a 0.8 percentage point increase in home price appreciation in the US, according to Del Negro and Otrok (2007).

Studies have found varying effects on house prices after a 1 percentage point drop in the mortgage rate. Macro papers tend to study monetary policy shocks or shocks to long-term rates, while micro studies often focus on mortgage rate shocks using exogenous cutoffs like the conforming loan limit (CLL). Adelino, Schoar, and Severino (2020) found a semi-elasticity of -5.3 to -1.3 in the US.

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The elasticity of house prices to mortgage rates varies depending on the study. Fuster and Zafar (2021) used a consumer survey to find that a 2-percentage point increase in the mortgage rate only lowers borrowers' willingness to pay by 5 percent. This suggests that while mortgage rates have an impact on house prices, it's not as significant as other factors.

A 1 percentage point decline in mortgage rates can have a more substantial impact on housing activity. After a 1 percentage point decline, permits rise more than 10 percent, existing homes sales increase 5-10 percent, and residential investment expressed as a contribution to real GDP increases 0.3 percentage point (0.2 percentage point with controls), according to the authors' calculations.

Here's a summary of the estimated effects on house prices and housing activity after a 1 percentage point decline in mortgage rates:

As we look at the market trends for mortgage rates in 2021, one thing is clear: rates were historically low. In fact, the average 30-year fixed mortgage rate was 3.02%.

The COVID-19 pandemic had a significant impact on the housing market, with many buyers and sellers holding off on transactions due to uncertainty. This led to a surge in refinancing activity, with over 70% of refinanced mortgages being fixed-rate loans.

Mortgage rates were influenced by the Federal Reserve's monetary policy decisions, which kept interest rates low to stimulate the economy. This had a ripple effect on the mortgage market, with rates remaining relatively stable throughout the year.

Low mortgage rates made homeownership more affordable for many Americans, with the median home price increasing by 7.9% in 2021. However, this also led to concerns about a potential housing bubble.

House prices in 2021 were significantly impacted by mortgage rates. The decline in mortgage rates during the pandemic can only explain low single-digit house price increases, not the national house price boom.

Housing activity, including sales and construction, is very sensitive to interest rates. This suggests that changes in mortgage rates have a substantial effect on the housing market.

Our analysis shows that the semi-elasticity of house prices to interest rates is quite high, implying that even small changes in interest rates can lead to significant changes in house prices.

We use a variety of tools to track mortgage rates. The Federal Reserve provides information on its policy tools, including open market operations.

We also rely on the CME Group's FedWatch to stay up-to-date on market expectations. This helps us anticipate changes in interest rates.

In addition, we use Zillow's Housing Data to analyze the national and local housing markets. Specifically, we look at the ZHVI Single-Family Homes Time Series ($) to understand trends in home values.

We also consult Zillow's Los Angeles Housing Market data to get a sense of the local market conditions. This helps us provide more accurate information to our readers.

Our data sources include the Federal Reserve, CME Group, Zillow, and CNBC. We use these sources to stay informed about changes in mortgage rates and the overall economy.

For your interest: Local Credit Union Mortgage Rates

The semi-elasticity of house prices to interest rates is quite significant. The theoretical user cost model suggests that the decline in mortgage rates during the pandemic can account for the national house price boom.

However, our empirical estimates and prior studies indicate that the decline in mortgage rates can only explain low single-digit house price increases. Housing activity, both sales and construction, are very sensitive to interest rates.

House prices are not solely determined by mortgage rates. The sensitivity of housing activity to interest rates is a crucial factor that needs to be considered.

Intriguing read: Mortgage Refinancing Activity Rises as Rates Drop.