Three interest-rate cuts this year by the Federal Reserve have encouraged homeowners to seek out refinancing of existing mortgages and created a robust market for new home loans.
But the impact of the Fed cuts isn’t as direct or immediate as one might think.
Lending and housing experts say the accumulation of cuts to the federal funds rate this year has shaped the mindset of the homeowner and potential buyers, and any one cut can push them off the fence to seek either a refinancing or a first-time loan, whether or not their individual rate is lowered.
Shannon Buss, the new president of the Rhode Island Association of Realtors, said the three consecutive cuts by the Fed hasn’t led to a flurry of new buyers entering the market. But it’s helping the buyers who are already looking to afford more in a house. “Especially this time of year, you’ve got serious sellers and you’ve got serious buyers who are shopping. The timing of that October rate adjustment is helping those folks [who] were already in the market,” she said.
According to media coverage of the rate cuts this year, the cumulative effect has been to counter a series of increases to the federal funds rate in 2018.
In addition to cutting rates in October, the central bank cut its interest rates in September and July, seeking to give a moderate boost to an economy that is showing signs of slowing.
‘When there is the fanfare associated with any Fed move, that resonates in ... lending.’
MARY NOONS, The Washington Trust Co. executive vice president and chief retail lending officer
An environment of historically low interest rates, which has characterized the economy for several years, can spur consumer spending.
It has an impact on mortgage rates. But that impact is shaped by actions over a period of time, rather than a particular Fed move, said Mary Noons, the executive vice president and chief retail lending officer for The Washington Trust Co.
The market is more reactive if an action by the Fed is unexpected, she said.
“When it’s an anticipated rate cut, like this was, it’s already factored in,” Noons said. “So, the date that they cut it, in this case, the 30th of October, didn’t really have an impact on the mortgage rates. However, what it does impact is the consumer mindset. When there is the fanfare associated with any Fed move, that resonates in the lending population, and potential lending consumers, and that can spur some activity regardless of whether the rate has been affected or not.”
Washington Trust, headquartered in Westerly, has had a record 2019 with mortgage volume, including refinancing, reaching $925 million. Residential lending activity has been strong all year, given the low rate environment, but has accelerated in the last several weeks, she said. That appears to be driven by refinancing.
“It is weighted a little more toward [refinancing] than purchases,” she said. “Because your purchase market in the Northeast is seasonal, your activity in June is a lot different than December.”
Why the interest in refinancing? Washington Trust offers a no-closing-cost loan, which greatly reduces the risk of the homeowner in obtaining a new loan. Many homeowners are capitalizing on the low interest rates to obtain funds for home improvement, for debt reduction or for paying back student loans.
Serial refinancers, she said, are not afraid to use their home equity. But it has to be done carefully. Homeowners should always speak with someone who has an advisory perspective, not someone selling a mortgage, she said.
Refinancing remains one of the cheapest ways to borrow.
As of late November, the 30-year fixed rate for a mortgage was 3.7%, she said. “What are the rates on student loan debt versus 3.75[%]?” she said.
While individual mortgage rates vary depending on credit scores, debt loads, incomes and other factors, including the choice of lender, the average is now well below 4%.
In addition to impacting mortgage rates and loan amounts, the Fed rate can affect price appreciation in real estate, Noons said.
In an environment in which homes are appreciating by 5% a year, affordability becomes a challenge if rates are increasing, too, which lowers the number of qualified homebuyers and demand.
“You are more likely to qualify for more of a mortgage at 3.75[%] than 4.75[%] or 4.25[%],” she said.
What the rate cuts haven’t done is make mortgage qualification easier.
“It’s a much different process than it was seven or eight years ago, where if you had a pulse, they would give you a mortgage,” said Buss. “Now it’s a much healthier process.”
Buyers who want to secure a home now have to be prequalified, to compete for the limited supply of homes on the market. Still, she isn’t seeing a lot of people who are having trouble with qualification for loans.
“You have to qualify. You have to document that you can afford this house,” Buss said. “For us, as practitioners, it’s really important that that process be started before we take them out shopping, because especially in a seller’s market, which we’re still in, we’re dealing with multiple offers. If you’re not approved for a mortgage and you get into a multiple-offer situation, you don’t stand a chance.”
Mary MacDonald is a PBN staff writer. Contact her at Macdonald@PBN.com.
