How is The Coronavirus Shaking Up the Housing Market? – Mortgage rates have plummeted since the beginning of the year as a result of market movements in response to the coronavirus. In the most drastic actions since the 2008 financial crisis, the Federal Reserve, a.k.a. the Fed, cut its benchmark interest rate to near zero. The Fed doesn’t actually set mortgage rates; It determines the federal funds rate, which generally impacts short-term and variable (adjustable) interest rates.
This is the rate at which banks and other financial institutions lend money to one another overnight to meet mandated reserve levels. The Fed raises or lowers the federal funds rate to influence the direction of the U.S. economy toward strong employment and stable inflation. One of the Fed’s goals with a rate cut is to make borrowing less costly.
When the federal funds rate decreases, it becomes less expensive for banks to borrow from other banks and those lower costs can be passed on to consumers in the form of lower interest rates on mortgages, home equity lines fo credit, credit cards, and other loans. Lending standards also tend to relax, and people who were previously unable to obtain a mortgage because of lack of down payment or poor credit have an opportunity to borrow that was previously unavailable.
According to realtor.com, some people may feel the need to buy or refinance now so they don’t miss out, but uncertainty about the spread of the coronavirus has many people on edge about buying or selling. “It doesn’t mean that we won’t still see sales. But I would expect fewer crowds at open houses says Danielle Hale, Chief Economist at Realtor.com. She said that she would also expect more shopping online.
NAR reported a decline in listings across the country, and a survey released on Thursday indicates that nearly half of REALTORS® report decreased interest from home buyers. “If buyers are hesitant to go shopping because they want to avoid contact with others, this could dampen home sales directly,” said Hale.
“As social distancing is practiced by more people for longer periods of time, a slowdown in consumer spending could eventually lead to job loss and lower incomes. It will be some time before we know whether this action was sufficient to sustain economic growth, but it’s a large and coordinated move that will put households, the housing market, businesses, and the financial sector on better footing” says Hale.”
Hale doesn’t believe home prices will plummet, as they did about a decade ago. That’s because, during the previous financial crisis, there were more homes available than there were buyers. Today, there is a major housing shortage across the U.S., and even now there are many more buyers than reasonably priced properties for sale.
Will Lenders Let Mortgage Rates Go Lower?
Another question is emerging in the current near-zero rate environment: Will lenders let mortgage rates go lower? “A big question now becomes what kind of capacity lenders have,” said Tendayi Kapfidze, chief economist at LendingTree TREE. “If you don’t have enough people to process the volume you’re getting in, you’re not going to lower rates to attract more volume.
Low mortgage interest rates have spurred a refinancing boom from homeowners seeking to lower their monthly payments. Lenders are inundated and that could slow down the mortgage approval process for first-time and other home buyers. And Demand among home-buyers remains elevated, in spite of the short supply of homes for sale.”
Federal Reserve Chairman Jerome Powell said that he expects economic activity to be weak in the second quarter and that the Fed is “willing to be patient” and hold interest rates at zero until “we’re confident the economy has weathered recent events.”
“The uncertainty doesn’t change people’s long-term desire to own a home. They may not be brave enough to jump in and submit an offer now, given all the uncertainty. But they’ll still be looking,” says Hale.
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Tom Gilliam, REALTOR®
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Farmington Hills 48334
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