Housing experts expect mortgage interest rates to fall even further in the wake of the Federal Reserve’s surprise move over the weekend to slash the benchmark federal funds rate to nearly zero and pump billions in cash back into the economy.
On Sunday, the Fed slashed the rate by a full percentage point to the range of 0% to 0.25% — the central bank’s second emergency cut since March 3 in response to the worsening coronavirus crisis. The Fed also announced it was buying $700 billion in Treasuries and mortgage-backed securities, returning to a policy of quantitative easing meant to keep cash in the banking system and stimulate the economy. It also is encouraging the big banks to use their capital cushions to lend to individuals and businesses, and it lowered the “discount window” rate that it charges banks for short-term loans.
While Fed chair Jerome Powell acknowledged that the economy was on strong footing and that measures being enacted locally and nationwide were helping reduce the threat of COVID-19, he noted during a weekend press conference that economic impacts will be felt.
“We expect that the illness and the measures now being put in place to stem its spread will have a significant effect on economic activity in the near term,” he said. “Those in travel, hospitality and leisure industries are already seeing a sharp drop in business. In addition, the effects of the outbreak are restraining economic activity in many foreign economies, which is causing difficulties for U.S. industries that rely on global supply chains. … Moreover, the energy sector has recently come under stress because of the large drop in global oil prices. Financial conditions have also tightened markedly. The cost of credit has risen for all but the strongest borrowers, and stock markets around the world are down sharply.”
For the mortgage industry, all this likely means another extended period of record or near-record lows for long-term interest rates. That could spark another wave of home refinancing. The Mortgage Bankers Association praised the Fed’s move.
“By the end of last week, markets across the board were showing increasing signs of stress, with unprecedented volatility and widening spreads,” MBA Chief Economist Michael Fratantoni said in a statement.
“Today’s dramatic action by the Fed, lowering rates to zero, buying Treasuries and MBS, and encouraging banks to go to the discount window, will significantly reduce stress in the system,” he continued. “MBA expects these actions will lower mortgage rates, helping homeowners save money through refinancing, and thereby providing a boost to the broader economy.”
The National Association of Realtors also said these steps should help shore up the economy.
“The monetary policy change is the same one applied a decade ago during the Great Recession — the lowest rates combined with quantitative easing,” NAR Chief Economist Lawrence Yun said in a statement. “This is an all-out measure to prevent a recession and fight the fear that is blanketing the country. It is the right policy, since the policy can easily be reversed should a vaccine be discovered or the virus goes away. “ Yun also noted that the mortgage and housing markets are on much more stable footing today than a decade ago, with more stable mortgages and the absence of a subprime market.
The markets did not react well to the Fed’s move, however. The Dow Jones Industrial Average cratered at the opening bell, and was down more than 2,000 points in the early afternoon after initially recovering some of its losses. Markets are jittery because the central bank has little leverage left to respond should the crisis worsen and economy slip into a recession.
