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The Interest Rate-Driven Housing Rebound

Housing is the single largest contributor to the U.S. economy according to the Federal Reserve, and as the most interest-rate sensitive sector of the economy, Fed interest rate cuts have had an impact on mortgage rates. Bloomberg reports that mortgage rates have fallen by more than a percentage point over the past year.

After declining in each of the previous 12 months, the National Association of Home Builders’ Index of Traffic of Prospective Buyers turned positive in August and September. Additionally, August housing starts hit 1.36 million on an annualized basis, the most since June 2007.

“On the most fundamental level, the current cycle is still beset by a dearth of entry-level homes as builders continue to gravitate toward high-end homes to offset steep labor and construction costs,” said Danielle DiMartino-Booth on Bloomberg. “This impediment will keep the trend toward renting alive, which could well suit the budget given that in September prime-age home buyers, or those aged 25 to 54 and who comprise 64% of the workforce, accounted for just 37% of the jobs created.”

The Federal Reserve approved another rate cut earlier this year, taking down its benchmark overnight lending rate to a target range of 1.75% to 2%. The Fed said in its policy statement that it was cutting rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

In a statement realtor.com’s Director of Economic Research Javier Vivas discussed current market conditions and what to look for in the wake of rate cuts.

“The cut in the Fed’s short term rates is unlikely to lead to noticeable drops in mortgage rates over the immediate horizon,” Vivas said. “Rates remain about a percentage point lower than a year ago. However, despite higher purchasing power, consumers faced declining housing inventory in August, especially at the entry level. For buyers, today’s vote removes the urgency to sign a purchase contract, as expectations of continuing low mortgage rates collide with increasing clouds over the economic horizon.”

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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