Is The Federal Reserve About To Cut Interest Rates?

So this month, Grant and I want to revisit some of the macro-economic warning signals that we discussed earlier this year now that the Federal Reserve have given us some additional guidance for the remainder of 2019.

First off – What did the Federal Reserve Say?  Well, they definitely seem to be backtracking now on interest rate increases now that they have acknowledged that the economic slowdown is sharper than they had anticipated. Having previously stressed no interest rate hikes in 2019 (remember that!), the markets are now anticipating at least one rate cut next month with another cut likely before the end of the year! 

So what was the impact?  We have this massive blow-off top happening in equity markets at the same time as a flight to safety in Bonds and Gold – you simply can’t make this up! As one analyst on CNBC described it, "Equities are having a Recession Party."

What does all this mean for Real Estate you may be wondering?

On the PLUS side for Real Estate, we have seen a massive 100-basis point drop in Mortgage Rates with the 30-fixed rate mortgage now starting with the important “3-handle” because of moves in the overall Bond Markets. That is to say a 30-Year Fixed mortgage interest rate starting with the number 3! Anytime mortgage rates are in the 3’s you can be sure that buyers will be attracted.

It’s also great news if you’re looking to refinance and do house improvements!

Worryingly However, Consider the Following:

  • The Palm Beach County housing numbers in May indicated that inventory levels and the number of days to get a contract were both significantly higher. Translation: more supply and slowing demand…. All the more reason why lower mortgage rates right now are so important.
  • There is yet more evidence the consumer is tapped with consumer debt at record levels.
  • While Real Estate Sector stocks have increased with the broader market, a closer look indicates that it is Single Family REITS that have largely benefited from the move, not builders. REITs, also known as Real Estate Investment Trusts, are a low interest rate play with high dividend returns.
  • Also, consider this: Stocks have been pushing to new all time highs while at the same time mortgage applications are down and inventory of homes is increasing... so clearly there is a disconnect occurring.
  • The inverted yield curve continues to overhang the market while at the same time, a massive flight to safety is happening. Just take a look at Gold breaking to new 5-year highs and bond yields. There appears to be a massive scramble to buy assets that are perceived to be safe.
  • We also have a split with the 17 Federal Reserve board members, 8 of which are advocating for a cut in interest rates, 8 are advocating for rates to remain unchanged and 1 member looking for an increase. Keep in mind the primary goal of the Federal Reserve is a strong jobs market and stable prices independent of political pressure.
  • Finally, worldwide economic growth slowdown concerns continue to be a major factor as do declines in business confidence surveys as well as a massive budget deficit.

Clearly the housing market is facing some headwinds and some significant downward pressure in the marketplace:

Consider these 3 important factors:

  1. We have definitely Reached the Top of Real Estate Cycle - 2008-2018. Note: Each RE Cycle is 7-10 years, so it makes sense that we are starting our downward leg.
  2. We’ve reached the Top of Debt Cycle. 4 interest rate increases in 2018 (9 in all by the FEDERAL RESERVE) have now created headwinds with consumers highly leveraged. Note: Every 1% increase to the mortgage rate impacts buying power by 10%, meaning less qualified people equals less buyers.
  3. Buyers have Price Fatigue. Property Values have increased more than 40%+ since 2008 and yet wages have simply not kept pace, perhaps 10%. So something has to give, either people get paid more or prices have to come down....Which do you think is more likely?

Looking Ahead For the Rest of 2019 As It Relates to Housing:

We can certainly extrapolate some themes here:

First - The average household’s cost to service debt has reached a point at which it will become more difficult and challenging to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA).

Second - Housing affordability issues will continue to be a theme going forward.

Third – Inventory will continue to Increase, prices will soften and properties will likely sit on the market for extended periods of time.

Finally – The effects of the worldwide economic slowdown will be felt here in the USA throughout 2019 and into 2020 and will have a knock-on impact for the housing market.

Going forward we will definitely be keeping a continued close watch on prices, interest rates, inventory levels and the number of closed sales.

So How About Some Takeaways:

BUYERS: Now is the time to step into the market and take advantage of a 30-year fixed rate mortgage under 4%, especially now that inventory has been increasing and there is more choice than before.

SELLERS: Expect more offers if you are priced right. Competition has increased and buyers have more choices, so this is a beauty contest and a price war; prepare your property for sale and price it well.

Here is a quick video going into more depth of current economic indicators:

Review the Palm Beach County Market Statistics for March in Detail Here:

Closed Sales 1,860 1,721 ⬆︎8.7%
Closed Sales (Paid in Cash) 628 568 ⬆︎10.6%
Median Sale Price $364,900 $355,000 ⬆︎3.1%
Median % of Original List Price Received 94.6% 94.8% ⬇︎ -0.2%
Median Days to Contract 52 49 ⬆︎6.1%
Inventory (Active Listings) 7,184 7,078 ⬆︎ 1.9%
Months Supply of Inventory 5.1 4.9 ⬆︎ 4.1%
Closed Sales 1,453 1,476 ⬇︎ -1.6%
Closed Sales (Paid in Cash) 840 878 ⬇︎ -4.3%
Median Sale Price $185,000 $175,900 ⬆︎ 5.2%
Median % of Original List Price Received 93.6% 93.6% 0.0%
Median Days to Contract 56 51 ⬆︎ 9.8%
Inventory (Active Listings) 6,131 6,122 ⬆︎0.1%
Months Supply of Inventory 5.5 5.5 0.0%

The Palm Beach County market statistics are courtesy of your REALTOR®, a proud member of the Realtors® Association of the Palm Beaches (RAPB). RAPB represents over 14,000 members involved in all aspects of residential and commercial real estate.