Interest rate relief arrives at last

The housing market has been in the Intertropical Convergence Zone for well over a year. For the non-nautical reader, that’s “the doldrums,” a place in the ocean where there’s no wind and sailing ships sit idle, waiting. The market has been anxiously awaiting good news to fill its sails.  

Over the past eighteen months, the combination of severely scarce inventory and high interest rates has slammed both buyers and sellers, reducing the market to a chaotic shamble. An interest rate move would be quicker and easier to execute than miraculously finding the four million housing units experts say are needed to cure the inventory problem, so that is what the market eagerly anticipated as the Federal Reserve met Sept. 18. And the Fed did not disappoint, cutting its benchmark rate by half a percentage point. That’s a nice big bold action to take: it signals “game on!” for an interest rate-sensitive real estate environment.  

Before we break out the champagne though, yields on longer-term Treasurys rose to 3.75%. If the economy remains solid and inflation seems stable at the Fed target rate, there’s no incentive for long-term Treasurys to fall, and mortgage rates trend with the Ten Year Treasury. Right now, the 30-year mortgage fixed rate is 6% which is great by any historical measure, but don’t look for a return to the 2 and 3% days post-pandemic.  

It is possible the Fed will reduce the benchmark rate further when it next meets Nov. 6, although another fifty basis point drop would be overly stimulative, and the Fed doesn’t want to avoid a recession only to over-correct and rekindle another burst of euphoric easy money. Rates still have not fallen enough to make much of a difference in the affordability challenge, but the psychological effect is huge. At 7%, the monthly payment on a 30-year fixed mortgage per $100,000 is $665, at 6% the payment is $599. At 5% the monthly payment is $534: now it’s starting to move the needle, so let’s hope the Fed and the Treasury market ease off another half a point.  

The key component in the mortgage rate setting is the spread that investors want above the Ten Year Treasury yield. This is called a “term premium” which takes into account the extra risk holding a mortgage over a Treasury bond. Term premiums are influenced by the momentum in the overall economy, and right now, the economy has a lot of uncertainty. It takes time for the recent interest rate cut to work through the system. The assumption is that inflation is under control, and the labor market is at equilibrium, and the Fed has engineered the elusive soft landing.   

There has been a relentless barrage of negative news, but here is finally something to cheer about. Look for a further 25 basis point reduction in November and another 25 at the December Fed meeting. Enough of sitting on the sidelines in the doldrums: time for action! 

Raphael Barta is an associate broker with an active practice in residential, vacant land, and commercial/ investment properties. raphaelb@sandpoint.com.