NAHB Projects 25-Point Drop in Interest Rates

Posted on 16 August 2019 by CRadmin2

At the end of July, the U.S. Federal Reserve cut its short-term funds rate by 25 basis points to a rate of 2.25 percent, according to a report from the National Association of Home Builders (NAHB). Although the housing market is facing affordability issues from prospective homebuyers, the new rate will undoubtedly help by decreasing the cost of home loans.

The Federal Reserve’s policy has evolved over the last three quarters, and this is the reason why interest rates have fallen since last year. The housing market experienced a 10-year low in affordability just last fall, but the new policy has extremely positive prospects for both housing demand and home construction, which should reflect in the countertop industry. In addition, the new maximum interest rate provides an offset to the rising costs of construction.

Rising costs have been reducing affordable inventory, especially for entry-level buyers, and production costs have been the number one factor in the decline of affordability. The NAHB has already predicted a flat market for new homes and starts in 2019, and ballooning costs are a primary factor.

Looking at the larger picture of the overall economy, the Federal Reserve has said that the labor market is strong and activity is increasing at a moderate rate, which echoes the perspective of home builders, which is that the overall economy is slowing, labor shortages are being experienced and there are concerns about housing affordability. The Fed also stated that fixed investment for businesses has been soft, and this has also reflected in the housing industries in recent quarters.

Inflation has slowed, according to the Federal Reserve, and is currently below the target rate of 2 percent. If this trend continues, it will be in a position to reduce rates even further to spur on the slowing economy. However, there is no guarantee that this will transpire. The NAHB says that some investors are acting too aggressively in anticipation of a 75-basis-point reduction in the coming quarters.

Although the 75 point reduction may not happen, the NAHB still forecasts another 25 point reduction by the end of 2019 because of slowing inflation and growth, but the soft patch of the late-cycle housing market at the end of 2018 shows that there are still “ongoing macro risks.” To note, residential fixed investment is still down for the last year and a half.

For further information on the housing market, take a look at the Eye on Housing blog post by NAHB Chief Economist Robert Dietz.




 





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