Housing Market Impacts from Recent Federal Reserve Rate Cuts

Impact of Rate Cuts on Mortgage Rates and Affordability

Rate cuts by the Federal Reserve are expected to lower mortgage rates, enhancing affordability. Banks anticipate a decline in deposit pricing, which could lead to reduced mortgage funding costs. Overall, these changes are projected to stabilize loan volumes while supporting economic growth, benefiting potential homebuyers.

"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)

"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)

"Changes in interest rates impact the value of interest rate lock commitments (IRLCs) and the related residential first mortgage loans held-for-sale (LHFS), as well as the value of the MSRs." --- (BAC, sec filing, 2024/Q1)

"The Federal Open Market Committee is indicating that it will start to cut the federal funds rate later this year, with rate cuts supporting economic growth toward the end of 2024. GDP growth this year will be close to trend at below 2%, and the unemployment rate will increase modestly to somewhat above 4% by the end of 2024." --- (PNC, press release, 2024/04/16)

Buyer Sentiment Shifts After Rate Cuts

Buyer sentiment is shifting positively as interest rates decrease, with homebuilders noting an activation of pent-up demand and increased consumer interest. However, buyers remain sensitive to payment structures and economic conditions, indicating a complex response to the evolving housing market landscape.

"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)

"While it is difficult to predict the near-term impact on home demand of changes in the economy, including the impact of changes in mortgage rates, inflation expectations and consumer sentiment, over the longer term we continue to believe that the market for new homes will benefit from strong housing market fundamentals." --- (TOL, sec filing, 2024/Q2)

"With that said, as interest rates subside and normalize and if the Fed is actually going to begin to cut rates, we believe pent-up demand will be activated and we will be well prepared." --- (LEN, earning call, 2024/Q2)

"The only noticeable difference in terms of the buyers that were ultimately selling and closing to is that their average income has, of course, unfortunately had to continue to rise because of the interest rate environment today." --- (DHI, earning call, 2024/Q1)

"It definitely makes sense that the Centex buyer is a bit more rate-slash-payment sensitive, but I wanted to drill down on this a bit more and maybe see if you had any perspective on traffic across other parts of your business, that 60% that’s kind of active adult and move-up, and what you’re seeing from that buyer cohort, if anything, as rates move." --- (PHM, earning call, 2024/Q1)

Effects on Housing Supply and Inventory Levels

The recent Federal Reserve rate cuts have led to a careful balancing of housing supply and demand. Companies are adjusting their inventory strategies, with some maintaining a specific supply of homes while others note low existing home availability, indicating a tight market despite fluctuations in sales.

"So with that backdrop, let's talk about the financial impact of the shift. To meet the 60 day guarantee, we have to continue to have a 4 to 6 month supply of WIP inventory, but we will need to wait until later in the construction cycle to release homes for sale.This may cause" --- (MTH, event transcript, 2024/06/12)

"Here you can see the impact of build for rent on contracts in the month of June this year compared to last year.Even though sales were lower in this year’s Q3, we believe that many of the fundamentals that led to our prior outperformance remain intact, such as the low supply of existing homes for sale, a slightly weakening, but still good jobs market, the overall health of the economy and positive demographic trends." --- (HOV, earning call, 2024/Q3)

"It’s more around making sure we’re balancing supply and demand now. So I’d say it’s pretty close to targets on kind of where we’re at now for the inventory. Saul Hadassin: Thanks." --- (RMD, earning call, 2024/Q3)

"For the six months ended May 31, 2024, the housing gross profit margin decreased year over year mainly due to higher construction and land costs, partly offset by decreases in both homebuyer concessions and inventory-related charges." --- (KBH, sec filing, 2024/Q2)

"Our strategy is looking for a month's supply of inventory on hand. So if the sales pace is pulling back because there's a negative event in the market, then we will start fewer homes to always kind of retrigger to have the right number of homes." --- (MTH, event transcript, 2024/05/20)

Affordability Challenges in the Current Market

Affordability challenges in the current housing market are evident as residents exhibit price sensitivity, opting for lower price points and moving further out for better deals. Improving fundamentals and relative affordability are seen as tailwinds, yet demand remains market-specific, highlighting ongoing complexities in the landscape.

"I'd say the other impetus is that in several of our markets, I think people are aware of the improving fundamentals and the very attractive fundamental setup as it relates to affordability, supply and some of the improving rent growth." --- (ESS, conference, 2024/06/04)

"We are already seeing marked improvement to the new lease change in the third quarter, but we expect this stat to continue to be volatile as the market works through filling these units, which remains a catalyst to our revenue growth. Rounding out the rest of Southern California, San Diego and Orange County are continuing to see good demand, but we are seeing some price sensitivity with residents willing to move further out in these markets for affordability reasons." --- (EQR, earning call, 2024/Q2)

"And then the relative affordability piece, I think, is one that has been clearly a nice tailwind for us from either a move outs to buy or just capture rate on new household formation." --- (UDR, earning call, 2024/Q2)

"So it's really a market-by-market question. But overall, we have healthy demand and in some cases, maybe for the reasons you just described, maybe even stronger demand for some of the lower price points." --- (AVB, earning call, 2024/Q1)

"And I think one of the other factors that's helping your portfolio, your markets is affordability." --- (ESS, conference, 2024/06/04)

Regional Variations in Housing Market Response

Regional housing markets are responding variably to recent Federal Reserve rate cuts. While 33% are expected to become seller's markets, areas like Greater Toronto and Halifax are adapting with vendor take-back mortgages. Overall, both Canadian and U.S. markets face challenges due to elevated interest rates.

"According to RE/MAX brokers' insights, 33 per cent of housing markets are expected to be seller's markets, but this may shift as competition increases and market conditions evolve. To view the regional data table, click here. Western Canada and Prairies" --- (RMAX, press release, 2024/09/03)

"Higher interest rates continued to weigh on property sales in the Advisory Services segment and investment and development activities in the Real Estate Investments (REI) segment, both of which are sensitive to market cycles." --- (CBRE, sec filing, 2024/Q2)

"And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you've been more susceptible to this market share loss as some competitors may have been less rational? Thanks." --- (KMX, earning call, 2024/Q2)

"While elevated interest rates have impacted land development in many markets, some sellers in the Greater Toronto Area and Halifax Regional Municipality are offering buyers vendor take-back mortgages on land purchases to close the deal. 'Density, population growth and the housing crisis remain significant factors influencing market activity, but a variety of drivers will have an ongoing impact on the Canadian commercial real estate market moving forward,' says Alexander." --- (RMAX, press release, 2024/06/06)

"The Canadian housing market, like the US, is currently challenged, and that's reflected in our results." --- (RMAX, earning call, 2024/Q2)

Long-term Implications for the Housing Market

Long-term implications for the housing market suggest stability in home values due to supply constraints, despite challenges from high mortgage rates and low inventory. While demand may fluctuate, a generally positive outlook persists, though significant declines in demand or prices could negatively impact mortgage insurance activity.

"Based on the origination forecast, we continue to estimate that the private mortgage insurance market will be approximately $300 billion in 2024, consistent with the prior year. I believe it's worth noting the positive impact that we expect from the continuing higher interest rate environment in terms of increasing our investment portfolio returns and maintaining strong persistency, benefiting our insurance in force. Additionally, the housing market remains supply constrained, which we expect will keep overall home value stable from an HPA perspective." --- (RDN, earning call, 2024/Q2)

"However, market challenges from higher mortgage rates currently running in the low to mid-7% range, housing affordability and low inventory are expected to persist in the near term." --- (FNF, earning call, 2024/Q1)

"We started the year with a solid quarter. While there are still some uncertainties in the economic landscape, the housing market remains resilient and the outlook for it is generally positive." --- (MTG, earning call, 2024/Q1)

"Based on the current demand conditions and construction cycle times, we continue to start homes at a pace consistent with closing 31,000 homes this year, as well as positioning the company to grow 5% to 10% in 2025, consistent with the multiyear outlook we have discussed previously. Through the first few weeks of July, traffic to our communities has been solid, but depending on how demand conditions and absorption paces evolve up or down in each market over the balance of the year, we will adjust our starts pace as needed. Now let me turn the call over to Bob for a review of our second quarter results." --- (PHM, earning call, 2024/Q2)

"A marked decline in housing demand, a significant and protracted decrease in house prices or a sustained increase in unemployment could reduce the pace of new business activity in the private mortgage insurance market and negatively impact our future new insurance written (NIW) volume, or contribute to an increase in our future default and claim experience." --- (NMIH, sec filing, 2024/Q1)

Economic Context Influencing Housing Dynamics

The economic context influencing housing dynamics is characterized by strong U.S. balance sheets and persistent inflation, alongside geopolitical tensions creating uncertainty. This volatility complicates the Federal Reserve's rate decisions, impacting housing market stability and access to homeownership.

"I think our view is that the U.S. economy continues to progress quite nicely, that balance sheets amongst our client base are quite strong, both on the institutional side and on the wealth side, and that there is plenty to do and that the higher rates that we see are in part, if not more than in part dictated by a view that we continue to have some inflation and that the economy is in healthy shape and maybe asynchronously relative to other places in the world." --- (MS, earning call, 2024/Q1)

"Business Environment During the second quarter of 2024, economic activity continued to be impacted by concerns about inflation and ongoing geopolitical stresses, including tensions with China and the conflicts in Ukraine and the Middle East." --- (GS, sec filing, 2024/Q2)

"We’re in a new, more volatile economic regime that is creating greater uncertainty for both the Federal Reserve and markets." --- (BLK, twitter, 2024/05/08)

"Advancing Policy Solutions that Tackle Barriers to Homeownership Cross-sector policy change driven by research and data is key to increasing access to homeownership and advancing a more inclusive economy." --- (JPM, press release, 2024/07/17)

"We have strong backlogs and momentum in every part of the firm. While the pipelines are healthy, there remains a backdrop of economic and geopolitical uncertainty." --- (MS, earning call, 2024/Q1)

Historical Trends of Rate Cuts and Housing Markets

Historical trends indicate that while rate cuts can enhance housing market strength by improving affordability and buyer incentives, persistent supply shortages and inflation continue to challenge market dynamics. Homebuilders anticipate that lower rates could normalize sales and stimulate demand, despite ongoing economic fluctuations.

"This is most often the foundation of a strong housing market, but the chronic supply shortage, the impact of interest rates on affordability and persistent and stubborn inflation have moderated housing market strength." --- (LEN, sec filing, 2024/Q2)

"So, right now we're running at about 50% spec as we talked about. I think long term, particularly if rates come down and the resale markets open up a bit, we've kind of targeted 40% to 50% as a long term appropriate business model for the percent that will be spec." --- (TOL, earning call, 2024/Q2)

"Although higher interest rates and economic fluctuations may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable." --- (DHI, sec filing, 2024/Q1)

"And so if we can get to a rate environment where we get over million existing home sales or whatever the number is and get into that normalized market, I think we'll take that any day over maybe even a couple of hundred million dollars of additional investment income." --- (FNF, earning call, 2024/Q1)

"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)