Fed rate cut to boost homebuyers' spending power

The Federal Reserve cut interest rates on Tuesday in response to the spreading coronavirus, and that could bring benefits to one sector of the U.S. economy just in time for spring: real estate.

Mortgage rates were already low – and the addition of a rate cut could provide an even more attractive opportunity for prospective homebuyers to enter the market.

“The real estate sector will hold up very well because of the rate cut,” Lawrence Yun, National Association of Realtors chief economist, said in a statement. “Hesitant homebuyers will be enticed to take advantage of low interest rates. Commercial property prices will rise due to higher returns than can be had from the bond market after adjusting for risks.”

The market dropped on Tuesday, as investors feared the Fed’s move signaled an oncoming economic slowdown. But a slowdown, too, could bring positive news for homebuyers.

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“If an economic slowdown comes to fruition, it will slow the steady climb of housing prices, another win for affordability and could allow more first time buyers to qualify for a loan during a time where there is little affordable housing on the market in most metros,” Emanuel Santa-Donato, director of capital markets at online mortgage lender Better.com, told FOX Business.

Affordability could remain a challenge for some buyers due to a lack of inventory. Experts have repeatedly said that inventory in the entry-level market is expected to remain tight – as millennials prepare to flood the market. Individuals born between 1981 and 1997 are expected to account for more than 50 percent of all mortgages by springtime.

But, over the near term, prospective buyers can take advantage of a boost in spending power.

“Prices remain quite high and inventory is still a little tight, so buyers can take advantage of lower interest rates and sellers can take advantage of the fact that inventory is still low,” Santa-Donato said.

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One section of the real estate market that could be immune to an active spring season is the luxury real estate market, which is facing headwinds that have carried over from 2019 – and the challenge brought on by the coronavirus. The spread of coronavirus is expected to dampen U.S. luxury real estate sales considering the U.S. has suspended entry into the country of foreign nationals who have visited China within the past 14 days. Chinese buyers showed the highest engagement of all non-domestic buyers from April 2018 through May 2019, even though they spent 56 percent less year over year – at $13.4 billion.

Trade tensions and tighter capital controls in China reduced luxury sales last year, despite low mortgage rates.

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In an emergency action on Tuesday, the Federal Reserve announced a 50 basis-point reduction in its benchmark federal funds rate, which now sits in the 1-percent-to-1.25-percent range. The decision was made in reaction to the spreading coronavirus, which has affected economic activity in countries around the world.

Experts told FOX Business last week that the Fed should cut rates “immediately.”

Such a move is not without precedent. In the midst of the 2008 financial crisis, the Fed and five other central banks called an emergency meeting that October to cut rates by one-half point.

Looking forward, experts have said the White House’s economic response will depend on how the situation evolves. Currently, it is a supply shock, but whether it becomes a demand shock, and consumers stop spending, is still unknown.

The Centers for Disease Prevention and Control said on Tuesday that at least 100 people are believed to have the coronavirus in the U.S., a figure that includes both presumptive and repatriated cases.

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