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How The Fed’s Rate Cut Affects the U.S. Housing Market Amid COVID-19

How The Fed’s Rate Cut Affects the U.S. Housing Market Amid COVID-19
3 min. read
How The Feds Rate Cut Affects the US Housing Market Amid COVID19

Image: Vladislav Gurfinkel / Shutterstock.com

Amid the coronavirus pandemic, the Federal Reserve announced it would cut interest rates to almost zero. Some experts believe this could be beneficial for the housing market, at least in the short run.

Last week, the Federal Reserve cut interest rates to almost zero, the new rates ranging from 0% to 0.25%. This is the most severe initiative since the financial crisis in 2008. Furthermore, the Fed will buy at least $500 billion in U.S. Treasury bonds and another $200 billion in mortgage-backed securities to balance home loans. The low rates are expected to remain until the coronavirus outbreak is subdued.

As 2020 began, the housing market was off to a good start. For the week ending February 27, the 30-year fixed mortgage averaged 3.45%, down from 4.35% a year ago, representing the lowest rate in three years. In light of the situation, the rates were cut even further. Doug Duncan, senior vice president at Fannie Mae, said in Philly Voice:

“Lenders’ expectations of consumer demand for purchase and refinance mortgages hit survey highs this quarter, with many lenders pointing to favorable interest rates as the engine driving the demand.”

The interest rates were already driving the housing market, which pointed to a promising recovery and an increase in refinancing. In January, existing home sales increased by 9.6% from a year ago to a seasonally adjusted 5.46 million, marking the second month of year-over-year increased activity. In addition, new home sales hit the highest level since July 2017. Housing starts also rose 21.4% year-over-year with 1,425 million units in January.

Effect on the Housing Market Could Be Positive

According to a flash survey conducted this month by the National Association for Realtors, the U.S. housing market is naturally seeing the influence of the coronavirus outbreak. However, low rates are considered to be a beneficial move.

Nationwide, there are signs that the number of sellers will rise, considering the advantageous lower interest rates. The most affected states are Washington and California, where the number of homes available on the market has decreased. Demand could also be strong. Lawrence Yun, chief economist at the National Association of Realtors, said that the low interest rates would be too appealing for demand not to rise.

On the other hand, some elements of the housing market might change in upcoming months. For instance, open houses in certain locations might be put on hold, while in the places where these activities do continue, visitors could be asked to respect stricter hygiene rules.

What’s more, Fannie Mae’s Economic & Strategic Research Group considers that the overall effect of the coronavirus crisis on the housing market could be positive if the virus is contained as more measures are being taken. Danielle Hale, chief economist for Realtor.com, believes lower interest rates will attract buyers to shop. Quoted by CNN, she said:

“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.”

Considering the changing nature of the current situation, it’s hard to tell how these measures will unfold over the next few months. While some buyers and sellers could be attracted by the lower interest rates, others might play it safe until the situation stabilizes.

Nevertheless, as new initiatives unfold, the housing market is getting at least some support to make it through the crisis. But, it remains to be seen how the rate cuts will affect the market in the long run.

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