Fed Cuts Interest Rates: What it Means For The Housing Market

3 August 2019

Fed Cuts Interest Rates: What it Means For The Housing Market

Inman News

The Federal Reserve cut interest rates for the first time since the recession. Will mortgage rates dip further?

The U.S. Federal Reserve announced Wednesday it would cut interest rates for the first time since a recession hit the U.S. economy in 2008. Real estate economists are split on the immediate impact it will have on mortgage rates and the housing market.

The Fed is cutting interest rates 25 basis points from between 2.25 percent and 2.5 percent to between 2 percent and 2.25 percent. It had previously signaled it would not hike rates at all in 2019 – after four rate hikes in 2018 – but it became more apparent in recent weeks that it would actually cut rates this time.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the Federal Open Market Committee said in a statement. “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2.25 percent.”

Since the Fed last raised rates, economic growth has slowed and inflation has remained the same, according to Danielle Hale, the chief economist at realtor.com.

“Although the labor market remains strong, with healthy job growth and the unemployment rate near long-term lows, the Fed’s concerns about our economic outlook and the long lag time between lowering rates and seeing effects in the real economy were key drivers of the decision,” Hale said.

Hale doesn’t believe the cut today will lead to a drop in longer-term mortgage rates, because the announcement has been anticipated.

“In order to see further declines in mortgage rates from this point, Chairman Jerome Powell would need to give clues about further potential cuts, which seems unlikely given the strength of the current data,” Hale added. “Homebuyers can enjoy today’s low rates without fearing they’ll regret a purchase today because tomorrow’s rates will be lower.”

Ruben Gonzalez, the chief economist at Keller Williams, believes today’s announcement could actually cause historically low-interest rates to rise.

“From the perspective of real estate, if the Fed’s policy move has its intended consequence of boosting inflation and maintaining the expansion of the economy, we should actually expect to see mortgage rates increase,” Gonzalez said.

A rise in mortgage rates could further impact an already slow housing market, as first-time homebuyers struggle with affordability.

“Increasing inflation and growth expectations will likely result in upward pressure on 10-year treasury yields after months of declines,” Gonzalez said. “Mortgage rates remain low by historical standards but affordability remains a challenge, especially for first-time homebuyers in coastal markets.”

“Rising mortgage rates could put a damper on an already slowing housing market, but the continued expansion of the economy and incomes are going to be the real drivers of the market,” Gonzalez added.

Lawrence Yun, the chief economist at the National Association of Realtors also believes the rate cut will have little impact on the 30-year mortgage, as the decline had already been anticipated. Still, other types of borrowers – those with adjustable-rate mortgage and commercial real estate loans – will benefit from the rate cut.

“These low interest rates will partly help with housing affordability over the short-term,” Yun said. “Both rents and home prices have been consistently outpacing income growth. The only way to mitigate housing-cost challenges as a long-term solution is to bring more supply of both multifamily and single-family homes to the market.”

Gill Chowdhury, a real estate broker at New York City’s Warburg Realty believes the rate cut will be great for business in New York City.

“Who wants to pay more when they can pay less? Nobody.” Chowdhury said. “From a practical perspective, the difference will mean buyers who are on debt-to-income thresholds may now be able to qualify for a property they couldn’t otherwise buy.”

“If you are financing and you have a 26 percent debt to income ratio post-closing, a building that requires 25 percent as a maximum is still out of reach despite the bank’s willingness to write the loan,” Chowdhury added. “A rate drop can mean the difference between board rejection and board approval.”

One of Chowdhury’s colleagues at Warburg Realty in New York City, however, disagrees.

“I think the impact is minimal,” Wendy Arriz, also a broker at Warburg Realty, told Inman. “So many deals in New York City are all cash. Plus, rates have been low for so long.”