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The Fed Hasn't Even Cut Rates Yet but It's Already Heating Up Housing Market

 Bradley KeounJul 25, 2019 9:10 AM EDT

The Federal Reserve next week is expected to cut official interest rates for the first time in more than a decade -- a move to provide fresh stimulus to the U.S. economy at a time when growth has been slowing.

But in the U.S. housing market, signs are emerging that the Fed's efforts already might be taking hold.

It's a function of how financial markets work: Starting a couple months ago, the mere anticipation of a Fed rate cut started pushing down borrowing rates in U.S. money markets, which in turn helped to drive down yields on 10-year Treasury bonds. That downdraft eventually prompted many banks to reduce the interest rates they charge on mortgages.

Rates on standard 30-year mortgages fell below 4% recently for the first time since early 2018, creating a more compelling case for first-time homebuyers to commit to a monthly loan payment and making it cheaper for existing households to trade up, maybe into a new home.

Data released this week show that existing-home sales in the U.S., as tracked by the National Association of Realtors, appear to have stabilized after trending down this year, economists said. And new-home sales in the U.S. rose in June at an annual rate of 646,000, some 7% faster than the pace in May, the Census Bureau reported this week. 

For the housing industry, it's a welcome change from 2018, when total home sales fell by about 3.1% as the Federal Reserve raised interest rates.

"The Fed's pivot is a contributor to the decline in mortgage rates, which has stabilized housing," said Doug Duncan, chief economist for Fannie Mae, a government-owned financing agency.

Renewed vigor in the housing market could bolster homebuilders like D.R. Horton (DHI - Get Report)  and Lennar (LEN - Get Report) , while supporting faster mortgage underwriting by banks like JPMorgan Chase (JPM - Get Report) , Wells Fargo (WFC - Get Report) and Bank of America (BAC - Get Report)   -- at a time when they could use the extra loan volume, and fees, to make up for shrinking lending margins.  

The housing industry's stabilization also offers a glimpse of what's to come if the Federal Reserve proceeds with a rate cut next week, as expected. Jerome Powell, the Fed's chairman, has pledged to use all of the central bank's monetary-policy tools to keep the current economic expansion going, even though it's already the longest in U.S. history at more than a decade. 

A report Friday from the Commerce Department is expected to show that the economy grew at a seasonally adjusted rate of 1.8% during the second quarter vs. the 3.1% pace in the first quarter.

But with most economists seeing Fed rate cuts this year as a near certainty, U.S. growth is expected to accelerate in the second half of the year, averaging 2.5% over the full 2019, just below last year's pace of 2.9%.  

President Donald Trump, who is running for re-election in 2020, has pushed for stimulus wherever possible, and most economists agree that his $1.5 trillion of tax cuts two years ago helped to maintain momentum. He's fulfilled his promise of creating "millions and millions of jobs;" the U.S. unemployment rate is close to its lowest in a half-century.

Yet the costs are adding up. Annual U.S. government budget deficits have climbed to about $1 trillion on the president's watch, and Trump's budget deal with Congress, which he announced on Monday via Twitter, provides for another $320 billion in government spending over the next two years.

The Fed's interest-rate cuts next week could have a cost as well, such as enticing some households and businesses to take on too much debt, or possibly fueling asset bubbles like the home-price rally whose reversal helped to trigger the 2008 financial crisis.

There's also the risk that the central bank could overstimulate the economy to the point where inflation spikes, or that the central bank will have less room to maneuver later, when the economy's actually heading into a recession.

But in the meantime, the housing-market's suddenly-sanguine outlook shows how quickly Fed interest rates can flow through the economy. 

The housing industry is a key source of data for economists because, for many families, a home is their most expensive asset. When the housing market is strong, households feel better about their finances and they often end up spending on everything from decorations to a new deck. 

"Ultimately you have to fill that home, and that means a lot more stuff bought at the mall," Beth Ann Bovino, chief U.S. economist at Standard & Poor's, said in a phone interview.

The extra spending means more stores are needed; those stores employ more people, and those people spend money at stores. There's also more demand for construction crews, engineers, architects, not to mention housing materials, and housing-materials suppliers.

According to Bovino, there's a rule of thumb that every new home helps create two to three jobs. 

https://www.thestreet.com/amp/markets/fed-has-not-even-cut-rates-yet-but-its-working-miracles-in-housing-market-15031511