With the Federal Reserve saying it's about to cut rates, will the housing sector finally come out of its own recession? All the indicators of housing health—existing-home sales, new-home sales, construction, and for sale inventories—are at multiyear lows, mainly because the Fed believes its only inflation fighting tool is restricting credit via higher interest rates.
For-sale inventories have edged up some 40 percent this year, as existing homeowners now see a chance to either move to a smaller unit, or into a retirement home now that mortgage rates are plunging. But existing-home sales are currently just 3.89 million units, per the FRED graph, far from its longer-term 4-5 million unit average—as much as 7 million during the 2005 housing bubble.
We now have a housing shortage of between 1-3 million residential dwellings, including owner-occupied and rental units, without considering housing for the homeless.
But what happens if the Fed waits too long to ease up on the brakes, job losses continue to climb and the overall economy goes into recession? That seems to be happening with last week’s bummer of an unemployment report, and financial market interest rates are reacting after more than two years of sky-high mortgage rates, for starters.
Mortgage rates decreased across the board last week and mortgage application volume reached its highest level since January of this year, according to the Mortgage Bankers Association (MBA).
“The 30-year fixed rate fell to 6.55 percent, reaching its lowest level since May 2023, following doveish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist.
The average rate for a 30-year mortgage backed by the Federal Housing Administration for entry-level and first-time homebuyers was 6.49% (that are backed by government-insured bonds), down from 6.69% the previous week, the 15-year was down to 6.03% from 6.27% the week before, and the rate for adjustable-rate mortgages was down to 5.91% from 6.22%, according to FNMA.
Most of the mortgage activity was in refinance, up 60 percent in a year, says the MBA. Homeowners have waited this long for the opportunity of a lower interest rate. Home purchases have barely budged; the MBA’s purchase index is down 11 percent in a year, mainly because home prices are still increasing 4-5 percent per year, and only the highest credit scores—upwards of 760—get the best rates.
Credit standards have barely eased, in a word. A score of 680 was acceptable to Fannie and Freddie for their best conventional mortgage rates prior to the Great Recession. The Fed’s inaction has only made matters worse for homebuyers (and therefore renters) due to the housing shortage.
What do I see for the rest of this year? It depends on the Fed’s actions. If it drops rates, then more homes become affordable, and more homes can be built because construction costs are controlled by the Fed’s short-term rates.
Fixed conventional 30-year mortgage rates set by Fannie Mae and Freddie Mac that guarantee most conventional loans (i.e., not government insured or privately held by banks) had been at or below 5 percent since the Great Recession of 2008-09 (gray bar in 30yrfixed graph is pandemic recession), before they began their upward spike in 2022.
It’s a long way back down that interest rate mountain for housing to become affordable again and many more homes built to ease the housing shortage. A Fed-engineered recession will bring down interest rates and housing prices sooner, but that also means fewer working folk can afford them, so who will it benefit?
Harlan Green © 2024
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