THE FEDERAL RESERVE SAYS “NO”
After the third federal interest rate cut this year, the Federal Reserve believes that the U.S. economy is now safely at cruising altitude. In fact, experts say the outlook is quite good and, as a result, our economy is quite resilient moving into 2020.
In an interview on Yahoo Finance, Chicago Fed President Charles Evans states,
“I don’t see we necessarily have to cut rates more, but we’ll see how the data comes in.”
The most recent federal interest rate cut was approved last month. The expected cut came in at a quarter percentage point, to a target range of 1.50% to 1.75%. It was the third cut this year, following nine cuts since December of 2015. Policymakers refer to the latest decrease as the last of the “insurance cuts.”
Why The Cuts?
All these cuts are meant to bolster the ability of the U.S. economy to withstand any potential headwinds. By “headwinds,” experts are referring to the current global slowdown, combined with a manufacturing slump in the U.S. and our trade war with China. Along with the decrease came language pointing to a higher bar for any potential future cuts.
New York Fed President John Williams puts it this way:
“We want to keep this Goldilocks economy going, not too hot, not too cold. It’s a combination of responding both to what we’re seeing in the data but also looking ahead and seeing where this economy is likely to be next year and the year ahead.”
While that’s good news for the economy, these same experts caution that lower rates might not offer much lift when it comes to the housing market. That, in spite of the fact that housing is one of the pathways by which Fed policy produces results. When the central bank cuts interest rates, people are encouraged to buy houses and builders are encouraged to ramp up construction, meeting the demand when borrowing is easier. Buying a home and building one causes ripple effects throughout the economy. Why? Because with a new home, people will be buying furniture, and builders will be hiring workers.
But today, housing is no longer the engine it once was before the financial crisis. After the housing bubble burst more than a decade ago, banks and other financial institutions became far more cautious in their lending. This caution created new federal rules meant to discourage risky loans that helped create the financial crisis in the first place. No one wants a return of the bubble-era when borrowers were allowed to state their income without verification. Still, some experts argue that the pendulum has swung too far the other way.
Today’s Typical Homebuyer
The typical home buyer today has a FICO credit score of 741. It was only 700 before the housing crisis. Lending standards have loosened a bit over recent years, but they still remain tighter than they were in the early 2000s, prior to the subprime lending boom.
Melissa Stegman, a lawyer at the Center for Responsible Lending, an advocacy group, says:
“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.”
HIGHER HOME PRICES, LOWER INVENTORY
In recent years, housing prices have risen faster than wages in much of the country. And many cities, particularly on the coasts like Santa Barbara, are in the midst of a full-blown affordability crisis. According to the real estate site Zillow, in places like San Francisco, Seattle, and Boston, the median price of a home listed for sale is well over half a million dollars. Even starter homes in our neck of the woods can top $300,000. Even more discouraging for first-time buyers is the fact that few are available in Santa Barbara at that price. A modest Federal interest rate cut will hardly make a difference anyway, 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 home buyers, 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.”
That’s why experts say the few entry-level homes on the market today get snapped up so quickly. And that alone perpetuates the increasing home values in some of markets like Santa Barbara.
But, in the long run, having the Fed’s benchmark rate in a range of 1.5% to 1.75% serves everyone well which means all those Federal interest rate cuts make it a good time to buy or sell a home in Santa Barbara. You don’t have to worry about losing any equity in your home because Santa Barbara real estate retains its value. Plus, I have many amazing listings on my comprehensive website to show you. Please take a look then call me at +1 (805) 886-9378 or email me at Cristal@montecito-estate.com. I can help you sell your existing home and find you a new one to love.