IS AN INTEREST RATE CUT COMING?
The U.S. Federal Reserve is likely to announce a Fed rate cut by the end of this month. Cutting federal interest rates, also known as the federal funds rate, could move domestic and global real estate markets in big ways, including the luxury sector right here in Montecito. This expected cut will be the first since the 2008 financial crisis and follows a steady stream of rate hikes since 2015. Experts say the move’s trickle-down effect may be a big help for entry-level luxury buyers and savvy real estate investors. It also could encourage more foreign purchasers to buy property in the U.S.
As anyone who keeps up with the real estate industry knows, the federal funds rate is the rate at which banks with balances held at the Federal Reserve can borrow from one another on an overnight basis. The U.S. housing market feels the impact of any changes in this rate in several key ways, even though there is no direct correlation between mortgage interest rates and the Fed’s funds rate. If what experts predict comes true, this will be particularly beneficial for first-time buyers looking to invest in real estate, especially Millennials who have been waiting to purchase their first home.
Mortgage rates loosely follow the 10-year Treasury bond rate, which is tied to the Fed’s funds rate, defining where mortgage rates go. That means when the bond yields go up or down, mortgage rates follow. It is widely expected that the Fed will cut rates on July 31. The real question is whether they’re going to cut rates by a quarter-point or by half a percent.
The Luxury Home Sector
Experts say the effect of the Fed rate cut on the luxury home sector depends on how much the Fed lowers the rate. It currently stands at 2.5%. Whatever the decision, any ripple effect on the housing market will take weeks, if not months. Experts concur that the highest tier of the luxury home market won’t be impacted unless the rate change is half a percent or higher.
“There’s been so much credit out there, especially on the luxury market side and in the commercial markets, for so long, that I don’t think that a drop in interest rates is going to have much impact on either (of those markets),” said Andrea Heuson, professor of finance at the University of Miami Business School. “Just because anybody who wanted to borrow has been able to borrow.”
Some authorities are speculating that in the coming months, we will see multiple rate cuts which could mean excellent news for the luxury sector. That is because lower rates mean lower monthly payments. That alone could increase the amount that a buyer can spend to move up into the luxury market or to add to their real estate portfolio.
Cash or Mortgage?
All homebuyers in every sector need to decide if they want to take out a mortgage or simply buy with cash, as many luxury homebuyers do. The federal tax law changes that went into effect at the beginning of 2018 might help them choose. That’s because buyers may now deduct mortgage interest on the first $750,000 of their debt for any recent home purchases. That number is down from the $1 million cap on mortgages taken out before Dec. 16, 2017.
Leveraging Cheap Money
The industry is noticing a subset of very astute high-net-worth buyers experimenting with leveraging borrowed money to build potential returns. Experts say savvy investors are looking at making anywhere from 5% to 10% by putting their cash into bonds or stocks, rather than paying all-cash for a new home.
Luxury Homes for Sale in Montecito
Cristal Clark has many luxury home listings in Montecito for homebuyers to consider. For instance, the Ocean & Mountain View Ennisbrook Estate pictured at the top of this blog features a Modernist ambiance with a Mediterranean soul. The estate rests atop a knoll on approximately 2.25-acres in Montecito’s exclusive Ennisbrook community, meaning the new owners will enjoy impressive ocean and mountain views throughout.
Or imagine buying this Chic Montecito Contemporary as your first luxury property. The home, its spacious guest house and detached pool cabaña sit on approximately a half-acre, conveniently located close to Montecito’s Upper and Lower Villages. Think of it as a private retreat for your family and friends, a place that everyone you know will want to visit. Don’t be surprised if your visitors never want to leave!
Cristal also represents this delightful Jack Warner-Designed Upper Village Condo. Warner’s Montecito-based firm, the Warner Group Architects, was named four times to Architectural Digest’s list of 100 of the world’s top designers and architects. They designed the Bel-Air Country Club and a wing of the Santa Barbara Museum of Art among other notable architecture. Imagine owning a home with that pedigree.
To put all this into perspective consider the fact that at one time, a rate below 5% was considered impossible. Now, even before the expected Fed rate cut later this month, we’re seeing rates well below 4%. That means if you want to lock in a low rate and payment on your home for decades to come, this is the best the time to act.
If you are considering entering the luxury real estate sector in Montecito, or any of the upscale neighborhoods of Santa Barbara, or if you’re ready to sell your property here, give Cristal Clarke a call at 805.886.9378 or email her at Cristal@montecito-estate.com. Cristal has the knowledge, experience, and contacts to help you buy or sell in Montecito.