Fed’s Dovish Outlook, Stock Market Downturn May Benefit Home Buyers

It’s time to crystal-ball gaze into the future for an outlook on where home-loan interest rates are headed in 2019.

Analysts say the Federal Reserve Board has signaled it plans to gradually raise its Fed-funds interest rate in the coming months to 3% or slightly higher. The funds rate, which the Fed charges banks for loans, currently is in a range of 2% to 2.5%.

The next rate increase, likely 0.25 of 1 percentage point is expected, at the Fed’s next meeting, scheduled for December 19th, followed by an additional rate hike in early 2019. However, Federal Reserve officials recently signaled a more data-dependent approach to monetary policy in 2019.

“We anticipate the Fed will pause to examine inflationary pressures and the state of the macroeconomy, before acting one more time later in 2019 to raise the federal-funds rate,” predicted Robert Dietz, chief economist for the National Association of Home Builders (NAHB).

“This is a more dovish path than many others had forecasted earlier this year, when the expectation was for three or four rate increases from the Fed in 2019 alone,” Dietz said.

“The slight change in tone from the Fed, combined with soft business sentiment data and rising concerns regarding the risk of a recession, have led to a decline for the 10-year Treasury rate, which fell from 3.23% in early November to less than 2.9% this week,” Dietz said.

This will bring down mortgage interest rates and present more opportunities to prospective home buyers, the NHAB economist predicted.

“While it is clear that some economic momentum has been lost, as reflected in recent stock market declines, household formations remain healthy and the unemployment rate of 3.7% is near a 50-year low,” Dietz said.

On the supply-side of the residential construction industry, builders and remodelers continue to add workers, he said.

In November, 7,900 jobs were added to the construction industry, while almost 128,000 have been added over the last year. As of October, there were 292,000 unfilled jobs in the construction sector—the second highest tally for this growth cycle. And the stock of residential construction loans for builders has expanded 8% during the past 12 months.

The recent stock market decline could be nothing more than a simple correction, observed Lawrence Yun, chief economist for the National Association of Realtors (NAR). Yun believes a housing bubble prediction is misplaced, and the stock market correction could prove beneficial to home buyers by sparking a slowdown in interest rate hikes.

The benchmark 30-year, fixed-rate mortgage average declined to 4.63% week ending December 13th—the lowest point in three months—down from 4.75% a week earlier. A year ago at this time, 30-year fixed loans averaged 3.93%.

On December 16th Chicago-area lenders were charging a range of 4.57% to 4.737% on 30-year fixed-rate mortgages, reported rateSeeker.com.

“Mortgage rates have either fallen or remained flat for five consecutive weeks and purchase applicants are responding with an uptick in demand given these lower rates, said Sam Khater, Freddie Mac’s chief economist.

“Home loan interest rates declined amid a steep sell-off in U.S. stocks,” Khater said. “This rate reaction to the volatile stock market is a welcome relief to prospective home buyers, who have experienced rising rates and rising home prices in 2018.”

Yun of NAR said: “Mortgage rate increases from the summer months, all the way to November, have held back home-buying—but with the continuing stock market volatility, mortgage rates are now retreating. I think this is good news for the buyers, giving them a second chance.”

Most home buyers today are less concerned with stock market volatility and are instead “looking at income payment ratios and being able to afford a mortgage,” Yun said. Danielle Hale, chief economist for Realtor.com, said: “Many more Americans see their net worth more impacted by changes in the value of housing than by changes in the value of the stock market.”

Homeowner confidence is looking good, according to Hale, who noted that the national homeownership rate has steadily climbed from an all-time low of 62.9% in the second quarter of 2016 to a rate of 64.4% in the third quarter of 2018.

By comparison, only about half of American families (51.9% in 2016 and 53.2 percent at the highest level recorded in 2007) have stock holdings owned either directly or indirectly, such as in mutual funds.

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.