Fed lowers interest rates again.

Will mortgage rates follow? Economists and agents offered different opinions on how the 2nd rate cut of the year will impact housing market

by Patrick Kearns Staff Writer for Inman News. September 18, 2019

The U.S. Federal Reserve announced Wednesday it would cut interest rates for the second time this year, after having not dropped them since the 2008 recession. 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 percent and 2.25 percent to between 1.75 percent and 2 percent. It had previously signaled it would not hike rates at all in 2019 – after four rate hikes in 2018 but now it actually cut rates for the second time.

Tendayi Kapfidze, the chief economist at Lending Tree, said the impact on mortgage rates can often be ambiguous. “Since the last rate cut, mortgage rates are down 19 basis points and were down 26 basis points at the low, essentially matching the basis points Fed cut,” Kapfidze said. “However, this is the exception and not the rule.” “Federal funds and mortgage rates are not directly linked,” Kapfidze added. “Rather, they are often influenced by the same factors, yet rarely impacted to the same extent.”

Ruben Gonzalez the chief economist at Keller Williams told Inman news that market anticipation of the Fed’s actions has already impacted long-term rates, which does influence mortgage rates. However, unless there’s uncertainty surrounding Fed policy decisions, the market doesn’t usually see a lot of movement in mortgage rates as a direct result of Fed announcements.

“Trends in mortgage rates right now are being driven primarily by impact of trade policy and global economic pessimism on long-term treasuries,” Gonzalez said. “Recently, we have seen some stabilization of treasuries, and mortgage rates have risen slightly. However, without some genuine resolution to geopolitical tensions around trade, mortgages rates are likely to remain low for the remainder of the year.”

Some brokers don’t believe the decision will help buyers and the housing market. While affordability of cheap money helps buyers, the main factors they use in deciding to buy are the stability of the current economy and an optimistic outlook on the future. Neither is happening now. A rate cut will not cure the disease caused by the administration but rather be a temporary treatment at best.

Many real estate brokers however actually believe the rate cut will eventually strengthen the housing market. “Buyers will not necessarily see interest rates drop immediately, however, many believe that a rate cut will benefit the economy overall, which will help consumers have greater purchasing power and feel confident in their ability to manage a major transaction.”

Chowdhury added that, while he agrees that lower mortgage rates were providing a boost to the struggling market, drawing the parallel between a surge in construction and the housing market receiving a boost is giving developers too much credit.

On Wednesday morning, the U.S. Census Bureau reported that new privately owned homes authorized by permits jumped 12 percent year-over-year, while privately owned housing starts climbed 6.6 percent year-over-year.

Average FICO scores hit all-time high

The credit reporting firm said this week that the average score has now hit 706, marking a dramatic turnaround from a decade ago when average scores bottomed out

After years of steadily rising, the average FICO score in the U.S. has hit an all-time high of 706, the credit-reporting company announced this past week.

FICO vice president for scores and analytics Ethan Dornhelm wrote that “there have been nine consecutive years of increases in the national average FICO Score” to bring this year’s average to 706. Average scores had previously bottomed out a decade ago, in October 2009, during the housing and financial crisis. At that time, the average score fell all the way to 686.

But scores have rebounded since then and last year hit an average of 704 a record at the time that has now been bested by this year’s figure.

Average FICO scores over the past decade and a half | Credit: FICO

FICO, originally an acronym that stood for Fair Issac Company, introduced its credit scores in 1989. The scores are a three-digit number to help lenders determine how much risk a potential borrower represents.

They are one of the main credit scores that regularly come up when someone wants to get, for example, a home loan. Better scores generally translate to more favorable lending conditions, such as lower interest rates.

According to FICO, lenders typically see any score above 670 “as indicating good creditworthiness.” Scores between 740 and 799 are considered “very good,” and a score above 800 is viewed as “exceptional.”

The lowest possible score is 300, and anything below 580 is considered “poor.”

Dornhelm attributed the new high average scores to “increased consumer awareness around FICO Scores and credit education.” He also said that consumers have managed to purge from their files negative credit information that they accumulated during the recession, thus boosting their scores.

Dornhelm also pointed to a sustained period of economic growth that has helped improve consumers’ credit.

“The key driver of this trend,” he explained, “is the improved consumer financial health that has resulted from the steady economic growth that the U.S. has experienced since the Great Recession.”

Going forward, average scores will continue to change, and Dornhelm points in his blog post to trade talks with China, Brexit and interest rates as factors that “loom large as concerns of a recession persist.” And though he doesn’t explicitly say that the average will drop in the future, there certainly seem to be hints to that effect on the horizon.

“Recent origination vintages,” Dornhelm wrote, “have started to display modest increases in defaults.”

 BY JIM DALRYMPLE II

How Buyers Fund Their Home Purchase: Smart or Risky?

Buyers are doing everything from tapping into their retirement savings accounts to taking financial gifts from family and friends in order to bring more money to the closing table. Bankrate.com recently surveyed more than 2,500 adults about their home purchase to find the top ways they’re saving.

About 47% of first-time home buyers said they saved on their own to purchase a house. But others also sought help elsewhere, such as through a first-time home buyer grant or loan assistance program (21%), financial gifts from family or friends (21%), or by taking out money from their retirement savings (8.8%), the survey showed. Other less common efforts cited included getting an additional source of income (7.4%); receiving a loan from family or friends (6.3%); moving in with family or friends to cut down expenses (5.7%); and selling personal items like jewelry, cars, and electronics (4.9%).

Millennials are more likely than Generation Xers to say that they’ve used their retirement savings or sold personal belongings in order to find more money for buying a home, the survey showed.

“It’s troubling that people feel like they have to tap into their retirement savings,” Deborah Kearns, a mortgage analyst with Bankrate, told CNBC. “They’re already not saving enough for retirement, and they’re compounding the problem by taking out a loan or not contributing to save for a down payment.”

More importantly, what percent of first time home buyers, and Millennial’s or Generations Xers have any clue what the costs of retirement will take to live on a minimal retirement income? So many are living for the moment, trying to accomplish more of their bucket list and believe they will never retire.

May I suggest to you, put in play a fictitious model of your lifestyle and play it out for just a month. Where do you stand now? The federal government may not have a Social Security program in 50 years! It’s so simple to put away just 5% of your earnings a week and put it in your own IRA or similar.

Is a recession lurking?

Half of the real estate economists and experts surveyed by Zillow the past 2nd quarter believe that the next recession is coming in 2020, according to the second quarter Zillow Home Price Expectations Survey, recently released.

Of the 100 real estate experts surveyed, half said a recession was likely to come in 2020 with 19 percent specifically pinpointing the third quarter of 2020 — which lines up directly with the months leading up to the presidential election. Thirty-five percent of those surveyed said they believe a recession is likely in 2021, meaning 85 of 100 experts believe a recession is coming in the next two years. But they don’t think housing will be the main cause.

“Panelists were asked to choose and rank up to three economic and/or political factors likely to trigger the next recession, from a list of 10,” the study states. “Trade policy, a geopolitical crisis and a stock market correction were the most commonly chosen factors, respectively.”

“A housing slowdown was among the factors rated as least likely to cause the next recession, chosen by just 12.6 percent panelists that offered an opinion,” the survey continues.

Although experts say housing won’t cause of the recession, the potential slowdown will have an impact. More than half of those surveyed said they expect home buying demand in 2020 to be significantly lower than in 2019, while about a third of those surveyed said they expected it to be about the same.

“Home sales have been sluggish to start 2019 compared to the beginning of 2018, despite conditions that are more favorable for buyers now than they have been in quite some time,” the survey says.

The combination of slowing demand and an impending recession could be good news for potential buyers in the short-term and cause further slowdowns in overall U.S. home value appreciation going forward.

Panelists, on average, said they expect annual growth to be around 4.1 percent at the end of the year and slow further to 2.8 percent in 2020 and 2.5 percent in 2021.

The results of this year’s survey line up with a similar survey from May 2018, when more than half of the economists surveyed said they believed a recession was coming in 2020.

Home values are currently growing at a 6.1 percent annual pace, according to the survey, but growth has slowed in each of the past four months compared to the month prior. Panelists expect that trend to continue.

The results of this year’s survey line up with a similar survey from May 2018, when more than half of the economists surveyed said they believed a recession was coming in 2020.