Lower Rates Already Hit Housing. They’re Not Helping Much.


Cheaper mortgages are usually a boon to the housing market. But this year, a sharp drop in mortgage rates hasn’t provided much of a lift, and that could bode poorly for the Federal Reserve’s efforts to shore up economic growth.

To see why, take a look at what has happened in housing since mortgage rates began a sharp decline late last year.
Consumer borrowing costs, including mortgage rates, are heavily influenced by the market for government bonds, and yields on those bonds have been falling this year. Similarly, the rate on the 30-year fixed mortgage rate is down more than one percentage point, to 3.75 percent last week, according to Freddie Mac.

Over the last 30 years, the rate has averaged about 6.25 percent. So the current rates might reasonably have been expected to spark a flurry of refinancing and home buying.

But, because of rising home prices, there has been no boom so far. Through June, sales of existing homes were down 2 percent from a year earlier, and investment in residential structures had declined for six straight quarters. Sales of newly built homes remain well below their recent peak in late 2017. And while home prices are still rising nationwide, the gains have slowed sharply in recent months.

The lackluster response to lower mortgage rates highlights a broader challenge facing the Fed as it tries to nudge the American economy along by cutting interest rates.

Lower rates usually encourage borrowing by consumers and corporations, lift stock and bond markets, and reinforce consumer and corporate confidence. All of which gives a bit of gas to the American economic engine.

But 10 years into an economic recovery, American interest rates are already low by historical standards. Prices for stocks and bonds are already high. And corporations are having little trouble finding places to borrow money. Such loose financial conditions mean it might take a sustained program of rate cuts — rather than a couple of reductions, as many analysts expect — for the Fed to have a true impact on the economy.

“Financial conditions are just easy all around,” said Priya Misra, head of global rates strategy at TD Securities in New York. “So it’s not clear what a cut can do.”

The housing market has traditionally been one of the most important channels by which the Fed’s rates can influence the economy because it can spur construction employment, sales of appliances and furniture, and services such as landscaping, all of which multiply the economic impact of a home’s purchase.

“In general what we’ve had is just not enough lower-priced homes and sort of a vicious cycle, where that limited supply has continued pushing prices up,” said Jody Shenn, an analyst at credit rating firm Moody’s who covers the housing and mortgage industry.

It’s not that the decline in interest rates doesn’t matter at all. The drop since late 2018 to 3.75 percent has knocked about $160 off a monthly mortgage payment on a $286,000 home — the median price of existing single-family homes in June, according to the National Association of Realtors — after a 20 percent down payment.

Applications to buy homes and refinance mortgages, which were slumping late last year, have recovered somewhat since mortgage rates began declining. It’s possible the drop in mortgage rates might simply need more time to influence the housing market.

But the market response so far seems muted compared with past instances of falling rates.

After a recession hit in 2001, for example, a series of rate cuts brought the Fed’s target for the its funds rate down to 1 percent from 6.5 percent. Mortgage rates followed, dropping from 8.5 percent to around 5 percent by mid-2003.

The low rates set off home building, consumer spending and financial activity that helped drive economic growth up to a nearly 7 percent annual pace in late 2003. The American economy hasn’t matched that level since.

If the reaction of the housing market to lower rates remains lackluster, it suggests the Fed’s may be less effective at fighting the next economic slowdown.

“The old view of the world, where housing is one of the key transmission mechanisms, is much less important than it used to be,” said Frederic Mishkin, a Columbia University finance professor and former Fed official.



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