Fed rate cut might not spur housing rally

The Federal Reserve is hoping that its latest interest-rate cut will help keep the economy safely at cruising altitude. But don’t expect it to provide much of a lift to the housing market.

Housing is one of the pathways by which Fed policy produces results. When the central bank cuts interest rates, it encourages people to buy houses (since mortgages are cheaper) and builders to ramp up construction (since demand is strong and borrowing is easier). Those decisions then ripple through the economy, as people buy furniture, builders hire workers and brokers cash their commission checks.

But housing isn’t the engine it once was. The sector is a smaller part of the economy than before the financial crisis, and a smaller share of Americans are homeowners. And with rates already low, it isn’t clear that a further cut by the Fed will do much for housing — if it lowers mortgage rates at all. (More about that in a minute.)

Interest rates still matter for housing. The Fed’s first two rate cuts this year helped stabilize the housing market, which had been heading for a major slump.The Commerce Department recently said construction added to gross domestic product in the third quarter after six quarters of contraction. And lower rates may give a new jolt to a refinancing boom that has injected billions of dollars into the economy in recent months. But few economists expect the housing market to take off in response to the recent rate cut, because rates aren’t what was holding back housing in the first place. Instead, they point to other factors.

It’s hard to get a mortgage

Interest rates don’t matter if no one will give you a loan in the first place. And a lot of would-be buyers are in that situation.

After the housing bubble burst over a decade ago, banks and other financial institutions became far more cautious in their lending, partly because of new federal rules meant to discourage risky loans. No one wants a return of the bubble-era “liar loans,” for which borrowers were allowed to state their income without verification. But some argue that the pendulum has swung too far the other way.

The typical homebuyer today has a FICO credit score of 741, compared with 700 before the housing crisis, according to data from the Urban Institute. Hardly any buyers have a score below 650. Other measures of affordability likewise show that lending standards have loosened a bit in recent years but remain tighter than in the early 2000s, before the subprime lending boom.

“There are a lot of people that have the income to afford their payments, they could be responsible homeowners, but they may have a lower FICO score, they may have a smaller down payment, and that really holds them back,” said Melissa Stegman, a lawyer at the Center for Responsible Lending, an advocacy group.

Glenn Kelman, chief executive of the online brokerage Redfin, said the combination of low interest rates and tight lending standards was exacerbating existing economic divides.

“Right now, money’s really cheap, but you have to have a good credit score to be able to access it,” he said.

Finding affordable home hard

Housing prices have risen faster than wages in much of the country in recent years. And many cities, particularly on the coasts, are in the midst of a full-blown affordability crisis. In cities like San Francisco, Seattle and Boston, the median price of a home listed for sale is well more than half a million dollars, according to the real estate site Zillow, and even starter homes can top $300,000 — if there are any available.

At those prices, a modest dip in interest rates will hardly make a difference, said Susan M. Wachter, a professor of real estate at the University of Pennsylvania.

“This interest-rate decline will not do it — it will not turn these potential owners into buyers,” she said. “Lower interest-rate costs are not effectively overcoming these affordability barriers.”

The escalation in prices is a particular challenge for first-time homebuyers, who must struggle to come up with an ever-larger down payment. And while price appreciation has slowed somewhat over the past year in many markets, that isn’t true for entry-level homes, which are still seeing low inventories and rapid price growth.

“The few entry-level homes that are on the market are getting snapped up so quickly that it perpetuates the increasing home values in some of these markets,” said Matt Speakman, an economist at Zillow.

Rates are already low

Interest rates on conventional mortgages have fallen sharply since late last year, in part because of the Fed’s rate cuts. That has encouraged borrowing: Lenders extended $700 billion in mortgage loans in the third quarter, the most since the financial crisis. Most of that surge came in refinancing, but there has been an increase in homebuying as well.

But with rates near record lows, it’s unlikely that many would-be buyers are on the sidelines awaiting a further cut. And if they are waiting, they might be disappointed: Many economists say financial markets have already “priced in” Wednesday’s rate cut.

“I’m skeptical that rate cuts are going to have any noticeable impact on housing in the short run,” said Ralph McLaughlin, deputy chief economist for CoreLogic, a real estate data provider.

ALYSSA POINTER / ALYSSA.POINTER@ AJC.COM Housing prices have risen faster than wages in much of the U.S. in recent years. The jump in prices is a challenge for first-time homebuyers, who struggle to come up with an ever-larger down payment.