The Federal Reserve decided to cut interest rates for the first time in four years, and its decision Wednesday suggested more rate cuts are coming.
This is great news for business, especially small businesses and companies that rely on operating lines of credit to manage day-to-day affairs. Lower rates flow to the bottom line.
The world of housing will get a big jolt from the rate cuts as well. That said, the price of money already has been working its way to help homeowners and buyers.
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Here are the key points for homeowners and home buyers from the Fed's rate decision.
Where rates are headed
The Fed cut its key federal funds rate from 5.25%-to-5.5% to 4.75%-to-5.0%. Projections suggest more rate cuts are coming in November and December, with the year-end rate probably ending at around 4.25%-to-4.5%.
Mortgage rates will continue to fall
Mortgage rates will continue to fall, but probably not as as dramatically as the change from highs seen in October 2023. The rate on a 30-year, fixed-rate loan is closing in on 6%. Mortgage rates have not been below 6% since September 2022.
Many housing experts believe home buying and selling will surge if rates succeed in falling below 6%
Mortgage News Daily said its daily rate on Wednesday was 6.15%, up a little from Tuesday's 6.11%. The rate, however, is down from the 8.03% rate it cited in October 2023 — just before the Fed announced it was ready to start cutting interest rates.
The weekly rate survey from Freddie Mac (FMCC) , one of the biggest suppliers of mortgage capital, put the 30-year rate at 6.2% as of Sept. 12. (A new report is due Thursday.)
Bankrate.com said Wednesday the 30-year rate nationally was about 6.28%.
The monthly payment has come down a lot
At the 8% rate seen in October 2023, the principal and interest payment on a 30-year, $250,000 mortgage would have been $1,834. At a 6.2% rate, the monthly payment on the same loan drops 16.5% to $1,532.
On a 15-year mortgage, the monthly payment drops from $2,250 to $2,016. (Yes, the payment is larger, but the loan is paid off in half the time.)
Refinancing activity should pick up
Refinancing activity should pick up, especially if rates continue to fall. Many owners who bought homes when rates were 7.5% or higher are probably talking to lenders already about when to refinance their loans.
Bankrate.com said the average national refinance rate was 6.33%.
In the past, many experts have said the best time to refinance is when the mortgage drops by two percentage points.
Evidence of the decline in mortgage rates could be seen in two housing reports on Wednesday.
Mortgage applications jumped. The weekly Mortgage Applications Index from the Mortgage Bankers Association rose 14.2%. Refinance applications surged 24% and purchase applications jumped 5%.
Housing starts in August increased. The Commerce Department said starts moved up 9.6% month-over-month to a seasonally adjusted annual rate of 1.356 million units. Briefing.com had projected 1.32 million starts. Single-family starts soared 15.8%. Building permits rose 4.9%.
Housing-related stocks were mostly and modestly lower. Many had been rising ahead of the Fed decision.
PulteGroup (PHM) was up 0.4% to $140.99. Lennar (LEN) slipped 0.5% to $188.43. Home Depot (HD) added 0.2% to $384.01. The iShares U.S. Home Construction ETF (ITB) was 0.14% to $125.56.
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The risks ahead
Risk 1: Home prices. This is the one area that has flummoxed the Fed, Chairman Jerome Powell said during his news conference on Wednesday. Some markets — San Francisco, Los Angeles, New York and Boston come to mind — are so high that younger buyers looking for that first-time home continue to be frustrated or move to lower-cost markets.
Risk 2: Rental prices. Turnover in rental units is slower, resulting in stubbornly high rents. "It takes time to get lower rents." Powell conceded. There's little the central bank can do except encourage the development of more housing. That's subject to land-use and zoning pressures.
Risk 3: Taxes and insurance. If you're buying or refinancing, watch taxes and insurance costs closely. These costs are rising in many markets and can swamp gains on mortgage costs. Insurance premiums in communities exposed to, say, wildfires, earthquakes or catastrophic storms are soaring.
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