Uncertain Variables: Effects of interest rate reduction uncertain for real estate

David M. Mitchell is not convinced the inflation dragon is slain.

Tyler Stalker: More first-time homebuyers will make long-awaited purchases.

Michelle Cantrell: Real estate brokers may find themselves competing for client dollars.

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Don’t take a victory lap yet when it comes to the Federal Reserve’s 50 basis point interest rate reduction. Considering that the Fed is far from the only variable in mortgage rates, the reduction is only one piece of the puzzle.

On Sept. 18, the Fed voted 11-1 for its first rate change since 2020, double the formerly anticipated 25 basis points. This decreased the federal funds target rate to 4.75% from 5%. While the headline prompted excitement in the real estate world, the significance of its impact is uncertain, local experts say.

Even so, any shift is welcome for Springfield, which has seen a major decrease in loans. According to the Springfield Business Journal’s 2024 list research for the area’s largest mortgage lenders, the number of loans completed by the top lenders decreased by 2,490 total loans – to 5,789 in 2023 from 8,279 in 2022.

In 2022, those banks held an overall mortgage volume of approximately $1.8 billion. In 2023, that reduced to $1.2 billion with some banks experiencing a difference of up to 67% less volume than the year prior.

Mortgage rates have already begun to decrease in recent months, seemingly in anticipation for the Fed’s rate cut which was originally expected to be 25 basis points, said David M. Mitchell, director of the Bureau of Economic Research, professor of economics at Missouri State University and director of the college’s Center for Economic Education. FreddieMac data supports this with mortgage rate decreases seen over the past several weeks. Weekly averages for a 30-year fixed mortgage were 6.2% the week of Sept. 12, dropping to 6.09% the week of Sept. 19. Fifteen-year FRMs dropped by 0.12% to 5.15%.

Tyler Stalker, senior vice president of residential lending management at Guaranty Bank’s south Glenstone location, said one of his lenders recently locked in a 30-year mortgage at a 5.65% interest rate. Michelle Cantrell, broker and owner of Cantrell Real Estate, has seen clients with rates in the middle and upper 5% range for residential properties and in the 7% range for investors, though that is dependent on the individual loan applicant.

Rate drops always stimulate the market, said Cantrell, and are welcome in the face of increasing home prices. According to the World Population Review, Missouri’s median home price has increased by 3% to $255,400 in 2024. The median sale price in the United States is $412,300 based on Federal Reserve Economic Data findings. Despite cost increases, Missouri ranks as the seventh lowest cost of living in the nation, according to the Missouri Economic Research and Information Center.

It’s hard to say what impacts the Fed’s cut will have for real estate in Missouri, however, Stalker expects to see more first-time homebuyers making long-awaited purchases. Homeowners may see it as a good time to downsize, as well, in anticipation for future potential market fluctuations. Downsizing has been difficult in the past, he said, because of housing cost increases making downsized homes the same price as some former fixed-rate mortgages. Stalker’s branch has also seen an uptick in refinancing recently as mortgage rates have increased. He anticipates that trend to continue. The Fed’s reduction is an overall morale boost for both homeowners and new customers.

“Anytime it goes down, it just creates a positive vibe in the banking world for real estate,” Stalker said. “It gets consumers excited again about maybe cheaper rates.”

Lawrence Yun, chief economist of the National Association of Realtors, spoke Sept. 24 at a Greater Springfield Board of Realtors forum, projecting a nationwide increase in housing inventory – spurred in part by the Fed’s vote. He reminded real estate professionals, however, that the Fed impacts federal funds rates, not mortgage rates. Yun anticipated seeing more homeowners selling because of life circumstances, releasing their previously locked 3% mortgage rates. Home sales, he noted, are nearing and crossing the zero line after having been in the negatives from 2021-22.

It’s a give and take, cautions Mitchell. With increased offers, sellers may become firmer on prices and less willing to negotiate. When it comes to real estate investment clients, brokers may also find themselves in competition with the stock market, Cantrell said. Minutes after the Fed announced its rate change, stocks began climbing. When the stock market is in good shape, investors often send their dollars there. With both the stock market climb and the potential mortgage rate decrease, Cantrell said both investment zones could compete for client dollars.

Of course, there’s the big variable: It’s an election year, which always brings uncertainty and makes consumers hesitant. Stalker said he hears many potential home buyers saying they want to wait until after November before they make major financial commitments.

The unknowns are numerous, Mitchell said, and inflation is a major part of that. He posited that the Fed made a premature, reactive decision to recent, slight inflation decreases. Inflation is, in part, a mind game, he explained. Once people expect inflation, they act accordingly – including the Fed. It could backfire: When housing consumers increase, the demand for housing goes up and takes prices and inflation with it in an endless feedback loop.

“That’s why I’m not entirely convinced the inflation dragon is slayed. He’s definitely down for the count. He’s on the mat, but I’m not convinced he’s dead and gone,” Mitchell said. “I’m not saying that the market isn’t softening. I’m not sure it’s softened enough. I’m very much one of those people who think inflation is more nefarious than people think.”

A reduction of 50 basis points will not have the impact consumers may believe it will, he adds. Plug numbers into a mortgage calculator and you’ll see. For the average home in Missouri, the 50 basis points may only reduce only $30-some dollars off a 30-year fixed mortgage. Besides, Fed rate decreases don’t hold up against income and credit worthiness when applying for a loan, agree Cantrell, Stalker and Mitchell. The reduction needs to be higher, Mitchell said, to make a real impact.

Stalker anticipated any future reductions in November or December would be modest. Mitchell does not foresee another decrease until after the election, positing any reduction would be at 25 basis points. Whatever the final vote may be, he said, any effects take time to set in so hold back the victory lap and stay tuned.

“It takes roughly a year for a rate change to have its effect and about three years before the effect is fully realized,” said Mitchell. “Had they wanted to actually make sure the economy was going to be significantly better, they should have been making cuts back in February and March. Today’s cuts are so close to the election that we won’t notice much in the economy between now and then.”