Real Estate Impacts of the Fed Rate cut on 3/3/2020

Recent Federal Reserve interest rate changes

On Tuesday 3/3/20, the Federal Reserve cut interest rates by half a percentage point, down to a range of 1% to 1.25%. Financial experts say the coronavirus could contribute to a market slowdown and the Federal Reserve are trying to get ahead of the curve and proactively mitigate the increasing negative impacts of the outbreak on the U.S. economy.

This interest rate cut was the :

• first rate cut outside of a scheduled meeting since the global financial crisis in 2008

• biggest rate cut since October of 2008

• first rate cut in 2020

And this rate cut resulted in the lowest mortgage interest rates since 2012, with additional mortgage rate decreases expected to continue in the short term.

Trends from last year to this year

In the last week of February 2020 compared to the same week in 2019:

• the average interest rate on a 30-year fixed mortgage was down 21%

• the average interest rate on a 15-year mortgage was down 22%

• refinancing activity is up 224%

• homeloan applications have risen 10%

NOTE: These trends are baselines from before the recent rate cut.

What to expect in the short term?

Mortgage Rates are expected to drop due to the recent rate cuts

This strong downward trend of mortgage interest rates is expected to continue in the next several months as a result of the recent Fed rate cut. While mortgage rates don’t move directly in sync with the Fed’s benchmark rate, they are directionally impacted, as lenders’ mortgage loan pricing is based on 10-year Treasury yields, which is directly impacted by the Fed rate cut.

Refinancing activity is expected to rapidly increase in the short term

As increasingly larger numbers of homeowners recommit to 15 and 30 year mortgages at new, lower interest rates and stay in their homes, this will likely have a real impact the number of available homes on the market, keeping this a seller’s market, or even strengthening the seller’s position.

With lenders being flooded with large numbers of refinancing applicants, this process is expected to take longer than it historically has due to backlogs.

More applications for home loans, especially among first time homebuyers

Interest rates don’t only affect the cost of a loan, but they also affect the interest someone earns on their savings. When you deposit money into a bank account, the bank uses that money to lend to other customers. When interest rates on those loans are low, savers are rewarded less for keeping their money in stable, risk-free savings accounts. As a result, low interest rates generally encourage spending behaviors.

Since lower rates mean homeowners pay less for their total loan (principal plus several decades of interest payments) over the life of a mortgage, buyers seeking a new home will find the rate adjustment very timely, and families that currently rent their home may decide to purchase a home now that low interest rate mortgages are available to them.

However, there are still some barriers to entry for buyers

Shortage of homes for sale

There is an expected increased shortage of homes for sale. With the current sellers market being bolstered by a significant increase in homeowner refinancing, and their related commitment to stay in (and potentially improve) their homes, there is expected to be a increasingly greater demand for homes than there are homes available for sale.

Inflation driving up home costs

Low interest rates can have downsides, as well. Low-cost loans will increase the amount of economic activity, but all that spending can also increase the likelihood of rising inflation, known as demand-pull inflation. This can increase the cost of homes, which then would cause an additional barrier to home buyers – the ability to come up with the downpayment on the increased home sale price.

Conclusion

Will inflation and related home values and costs outpace the benefits of the lower interest rate mortgages? For a very small segment of buyers, potentially, but for most buyers and nearly all mortgage holders looking to refinance, the benefits of the lower interest rates are expected to yield dependably greater savings over time, driving large numbers of homeowners and potential homeowners to their bankers to take advantage of the recent and upcoming changes.