Federal Reserve Rate Cuts: Implications for the Housing Market

Impact of Rate Cuts on Mortgage Rates and Buyer Sentiment

Federal Reserve rate cuts are expected to lower deposit costs, which may lead to reduced mortgage rates and improved buyer sentiment. However, current caution among clients due to higher rates is impacting loan demand, indicating a complex relationship between rates and market behavior.

"with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter.If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline.On Slide 5, we highlight loans and deposits." --- (WFC, earning call, 2024/Q2)

"We expect the Fed to cut rates 2 times in 2024, with a 25 basis point decrease in September and another in December.Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, other non-interest income to be in the range of $150 million and $200 million, excluding Visa and securities activity." --- (PNC, earning call, 2024/Q2)

"Loans were flat quarter-on-quarter. CNI loans were down 1%, reflecting muted demand for new loans as clients remain cautious, and CRE loans were flat as higher rates continue to have an impact on originations and payoff activity." --- (JPM, earning call, 2024/Q1)

"On slide 15, we show the results for wealth for the first quarter. Wealth revenues decreased 4%, driven by a 13% decrease in NII from lower deposit spreads and higher mortgage funding costs, partially offset by higher investment fee revenue." --- (C, earning call, 2024/Q1)

"This growth was partially offset by a decline in mortgage banking, primarily driven by our efforts to simplify the home lending business as well as lower deposit related fees reflecting our efforts to help customers avoid overdraft fees." --- (WFC, event transcript, 2024/04/30)

Effects on Home Prices and Future Market Outlook

Federal Reserve rate cuts are influencing home prices through adjustments in pricing strategies by builders, driven by market demand and inventory conditions. Builders are implementing incentives to enhance affordability, while rising consumer demand and inflation continue to push average selling prices higher, indicating a complex market outlook.

"And we might be moving to a few more town home communities to try to meet affordability targets for a given sub-market. With regard to pricing increases or price decreases, that's occurring very much week to week at a community level by our operators as they're gauging their market demand, their inventory conditions, and their future lot supply." --- (DHI, earning call, 2024/Q1)

"The increase in average selling price during the three months ended June 30, 2024 reflected the impact of consumer demand and persistent inflation, partially offset by a slight increase in the mix of first-time buyer homes, which typically carry a lower sales price." --- (PHM, sec filing, 2024/Q2)

"In response, new homebuilders have worked out incentive structures that range from interest rate buy-downs, to closing cost pick-ups, to price reduction designed to meet the purchaser at their intersection of need and affordability." --- (LEN, earning call, 2024/Q2)

"Our full year fiscal 2024 revenue, pricing and margins will be affected by market conditions and changes in mortgage rates in addition to our efforts to meet demand by balancing sales pace and price to maximize returns." --- (DHI, earning call, 2024/Q1)

"The increase in revenues for the period was driven by an 8% increase in closings to 8,097 homes, in combination with a 2% increase in our average sales price to $549,000. On a year-over-year basis, the increase in our ASP reflects modest price increases in our first-time and active adult communities, while prices in our move-up communities were consistent with last year. The increase in our average sales prices for the quarter also reflects the impact of mix, as we recorded higher closings within our move-up business, which at $650,000 carried much higher prices than our first-time and active adult business." --- (PHM, earning call, 2024/Q1)

Housing Supply Dynamics Post-Rate Cuts

Post-rate cuts, housing supply dynamics are characterized by a decrease in homes delivered, as seen in KB Home's 4% drop. However, demand remains strong, particularly for affordable, move-in ready homes, driven by millennials, Gen Zs, and Baby Boomers, indicating a complex market landscape.

"Housing revenues for the 2024 second quarter were down 3% from the year-earlier quarter, reflecting a 4% decrease in the number of homes delivered, partly offset by a slight increase in their overall average selling price." --- (KBH, sec filing, 2024/Q2)

"The economic growth in Texas fuels the positive momentum in the housing market and with over 90% of this region's average community being entry-level, a steady supply of affordable and move-in ready inventory has been in high demand." --- (MTH, earning call, 2024/Q1)

"Housing revenues of $1.70 billion were down 3% from the year-earlier quarter due to a 4% decrease in the number of homes delivered to 3,523, partly offset by a slight increase in their average selling price to $483,000." --- (KBH, sec filing, 2024/Q2)

"During the spring selling season with a healthy supply of move-in ready inventory, we were able to capitalize on strong market conditions generated by the increasing need for housing for millennials and Gen Zs as well as the move-down Baby Boomers who continue to find our limited inventory, limited availability of resale housing supply." --- (MTH, earning call, 2024/Q1)

"Our housing revenues of $1.7 billion for the quarter were down 3% from the prior year period, reflecting a 4% decrease in the number of homes delivered, partially offset by a slight increase in our overall average selling price." --- (KBH, earning call, 2024/Q2)

Broader Economic Implications of Rate Cuts

Rate cuts are anticipated to normalize bond and equity markets, driving investment flows and stabilizing financial balances. Market participants are closely monitoring the timing and impact of these cuts, which could significantly influence economic conditions, including the housing market.

"We continue to see fluctuations in the market expectations for rate cuts. Though our base case still assumes there'll be one rate cut in the U.S. in the second half of 2024." --- (SPGI, earning call, 2024/Q2)

"And we really feel that markets are on this precipice of a reset. Rate cuts should normalize bond markets, they should normalize fixed-income allocations, they should fuel equities, they should really drive flows. We've been a really meaningful outperformer in these re-risking periods." --- (BLK, earning call, 2024/Q2)

"Additionally, markets were focused on the potential timing and amount of policy interest rate cuts by central banks globally, as well as the potential outcomes of national elections." --- (GS, sec filing, 2024/Q2)

"And that is predicated on the points that you mentioned, which is that as you see rate cuts, we would expect those balances to stabilize." --- (MS, earning call, 2024/Q2)

"With the timing and likelihood of any rate cuts in the U.S. market still uncertain, our base case still assumes a modest year-over-year decline in issuance in the fourth quarter. Turning to Vitality, newer enhanced products generated $375 million in the second quarter." --- (SPGI, earning call, 2024/Q2)

Impact on REITs and Real Estate Investments

Lower Federal Reserve rates are expected to boost REIT performance, as evidenced by increased leasing volumes and occupancy gains reported by Simon Property Group. Additionally, Ventas highlights strong investment opportunities in senior housing, indicating a favorable environment for real estate investments driven by improved economic conditions.

"We are seeing increased leasing volumes, occupancy gains, shopper traffic, and retail sales volumes resulted in the company's highest level of real estate NOI for the second quarter in our company's history." --- (SPG, earning call, 2024/Q2)

"In order to maintain our status as a real estate investment trust ("REIT") for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains)." --- (O, sec filing, 2024/Q2)

"on attractive external growth opportunities. We closed approximately $300 million of value-creating investments in 12 senior housing communities, 10 of which are with existing Ventas operator relationships, bringing the year-to-date volume up to $350 million at a blended going-in yield greater than 8%. In addition to the accretive going-in yield, these investments are positioned squarely within our right market, right asset, right operator framework, and now is the right time to invest in senior housing as this favorable positioning amplified by the unprecedented supply demand backdrop will drive continued NOI growth resulting in unlevered IRRs in the low to mid-teens." --- (VTR, earning call, 2024/Q2)

"A failure to meet the noted DSCR tests could prevent GTP Acquisition Partners or the AMT Asset Subs from distributing excess cash flow to us, which could affect our ability to fund our capital expenditures, including tower construction and acquisitions, and to meet REIT distribution requirements." --- (AMT, sec filing, 2024/Q1)

"As to the second part of your question, which is fund flows into industrial real estate, there is a tremendous amount of money that has been raised and not spent in acquisitions and by investment managers. And my experience tells me that that money is going to get spent." --- (PLD, earning call, 2024/Q2)

Regional Variations in Housing Market Response

Regional variations in the housing market response to Federal Reserve rate cuts are significant. Companies like KB Home note that intrinsic business variations affect comparability across regions, while PulteGroup emphasizes Florida's importance. Favorable long-term conditions, such as undersupply and wage growth, also influence regional dynamics.

"These intrinsic variations in our business limit the comparability of our homes delivered, net orders and backlog, as well as their corresponding values, between sequential and year-over-year periods, in addition to the effect of prevailing economic or housing market conditions in or across any particular periods." --- (KBH, sec filing, 2024/Q2)

"Florida is a tremendous part of our business. We’re in nearly every major housing market there save Miami." --- (PHM, earning call, 2024/Q1)

"Longer-term housing market conditions remain favorable, supported by an undersupply of new and resale homes, solid employment, wage growth, favorable demographics and rising household formations." --- (KBH, earning call, 2024/Q2)

"First question, and maybe this is digging in a little bit to the regional trends a bit, but we have seen – you mentioned, obviously, rates have stayed higher for longer than expected." --- (KBH, earning call, 2024/Q2)

Long-term vs. Short-term Effects of Rate Cuts

Short-term effects of Federal Reserve rate cuts may include increased stability in investment decisions, as noted by SPG, while lower rates are generally seen as beneficial for real estate performance. However, potential slowdowns could temper immediate impacts, suggesting a complex interplay between short-term fluctuations and long-term positioning.

"So it's -- if there's a lot of variabilities out there. And -- but I don't think short-term fluctuation is going to have an immediate impact." --- (SPG, earning call, 2024/Q1)

"We're not anticipating a reduction in rates, but at least we feel like we're in a more or less a stable rate environment, that makes it easier to make investment decisions." --- (SPG, earning call, 2024/Q1)

"Just your thoughts generally with a three, eight, 10 year. If that's at all changing your view on kind of the upcoming debt maturities in the back-half of the year and how to fund those versus how much cash to keep on hand versus, David, maybe your commentary about the gap between you and others, your ability to be on the offensive to make investments now that if we do go into recession by the time they're done, you're kind of on the other side of it and you're well-positioned. So I'm just kind of curious, I know it's a broader question, but just how kind of the softening rate environment here, does that change anything you're doing or how you want to be positioned on the margin?" --- (SPG, earning call, 2024/Q2)

"So I think when -- and if -- and frankly I mean it's realistic to assume we may go through a reasonable slowdown here coming up." --- (SPG, earning call, 2024/Q1)

"So anyway, so -- but by and large, if rates go lower, that's better for this company." --- (SPG, earning call, 2024/Q2)

Historical Context: Previous Rate Cuts and Housing Trends

Historical rate cuts have historically incentivized homebuyers, as seen in D.R. Horton's 22% increase in loan origination linked to home closings. PulteGroup and Lennar note that lower rates could enhance buyer incentives, although current trends show some softening in market traffic.

"Paul Romanowski: Yes, Sam, we're pleased to be back at what we deem our historical norm, and you bring up a good point, we are building a more efficient house and it's been an extreme focus of us to try and pull labor and man hours out-of-the home to reach affordable and maintain affordability." --- (DHI, earning call, 2024/Q2)

"So I think the prospect that potentially rates might come down later in the year." --- (PHM, earning call, 2024/Q2)

"There will be a little bit more incentive as rates trend down. It seems that some of the incentives come off." --- (LEN, earning call, 2024/Q2)

"In the three and six months ended March 31, 2024, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 22% and 18%, respectively, primarily due to increases of 15% and 13%, respectively, in the number of homes closed by our homebuilding operations, as well as an increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing." --- (DHI, sec filing, 2024/Q2)

"The order trends that we saw the 1st 3 weeks of April were quite good, but we do work to be kind of transparent with the things that we're seeing in real time and we were seeing some softening of traffic." --- (PHM, conference, 2024/05/14)