- The Fed’s interest rate cut will ease financing conditions for homebuilders, analysts told BI.
- But other issues will restrict supply, from material costs to labor shortages.
- Current owners still won’t be tricked into selling, as many still have very low mortgage rates.
A Federal Reserve rate cut will affect the housing market, but its impact may not affect the most important part of the equation: keeping prices tight.
In fact, high borrowing costs are partly to blame for the affordability crisis that has engulfed US consumers, and lowering them will provide some relief.
Interest rates rose to multi-decade highs last year, and further rate cuts by the Fed should help lower borrowing costs over time.
However, it will increase the supply-demand imbalance, as more consumers are drawn away by cheaper loans. Pressures will rise for new home construction to meet demand, but finances are still tight for homebuilders, which is hampering the ability to bring more homes online.
According to the National Association of Home Builders, mortgages have increased from a low of 5% to 13% as of March 2022.
“The rapid recovery in housing from the rate cut will be seen in builder and mortgage loan conditions,” Danushka Nanayakkara-Skillington, NAHB’s assistant vice president of forecasting told Business Insider.
But how this translates into much-needed stimulus is a different story, and there are factors the Fed can’t fix.
Endless doubts
For example, Nanayakkara-Skillington noted that commodity prices, from drywall to steel mill products, have hit homemakers hard since the pandemic.
Although lumber costs are normal, he expects the recent increase in Canadian lumber tariffs to increase prices in the coming months.
Tariffs on Chinese transformers — which the NAHB considers a “necessary factor” delaying housing projects — have caused prices to drop 73% in the past four years, he said.
There are also limitations to consider. Nanayakkara-Skillington cited that 57% of home developers surveyed said there are not enough lots to build on, adding price pressure to available supply.
Urban Institute senior fellow Michael Neal told BI that local regulations are needed to fix the problem. He said that the challenges of the areas should be resolved to develop the presence of the areas, he said, while the cost of testing and times should be reduced.
But the biggest issue is the lack of skilled workers, Nanayakkara-Skillington said.
“Because we lost a million construction workers during the Great Recession, we’re still short of that. So we desperately need people to get into the workforce,” he said, noting that there are jobs about 250,000 open now.
However, the Fed’s cuts should improve the outlook for homebuilders in the coming months after a period of slowdown amid high borrowing costs, both analysts said.
Reduce the view of existing houses
Although it is difficult to predict when the housing market will recover, it depends a lot on whether low rents attract homeowners to start selling.
According to Fitch Ratings, that is currently unlikely.
Since many owners have mortgage rates below the current level of 6%, mortgage rates will need to fall significantly to stimulate supply, which will only happen if the Fed continues to cut.
The rating agency noted that about 24% of prime mortgages are priced above 5%, meaning homeowners will be stuck until rates reach that level. This won’t happen until 2027, Fitch said.
“While new housing stock has increased by 29% since the start of the pandemic, improving the supply of existing housing, which accounts for nearly 80% of real estate sales, is imperative improving prices and performance of housing markets,” the agency said.
At the same time, the Fed’s easing policy may not stimulate housing activity for another reason, Neal said.
“I think part of the Fed’s decision reflected concerns about whether or not people are going to get jobs,” he said. “At the same time, if you think rates will go down today, do you think rates will go down tomorrow?”
This thinking can cause people to slow down further, he said.
Wherever supply goes, the positive effect of low prices and high builder sentiment can be felt in the stock market.
In three of the past five months of rate cuts, the bank noted that shares of homebuilders outperformed the S&P 500 in the three months after the first cut.