"Due to pent-up demand in housing, especially in the Silicon Valley region, homebuyers and sellers have been closely watching mortgage interest rates and tracking home prices. The Federal Reserve's recent decision to cut interest rates by half a point will likely incentivize homebuyers sitting on the sidelines to continue their search," says Eileen Giorgi, president of the Silicon Valley Association of Realtors.
In her recent blog, Nadia Evangelou, senior economist & director of Real Estate Research at the National Association of Realtors, examined what homebuyers should consider in light of the Fed rate cut. Giorgi summarized these five points:
Lower mortgage rates
For prospective homebuyers, this can mean lower monthly payments or the ability to buy a more expensive home than they otherwise could. However, mortgage rates have already priced in some of the effects of the Fed's rate cut which could mean rates may not fall significantly after this cut.
Giorgi notes, "Those waiting for substantial interest rate reductions could be priced out once demand picks up and home prices continue to climb."
Easier qualifications for mortgages
When mortgage rates fall, the interest portion of monthly payments decreases, which lowers the total payment. This makes it easier for more borrowers to meet lenders' debt-to-income (DTI) ratio requirements and qualify for mortgages that may have been unaffordable at higher rates. Lenders also consider borrowers less risky since the smaller monthly payments reduce the chances of default. Lower rates not only help the process of qualifying for a new mortgage but also allow homeowners to refinance, according to Evangelou.
Stronger demand for housing
Lower mortgage rates reduce the cost of borrowing and increase purchasing power, which tend to drive up housing demand. In areas where housing inventory is already low, this boost in demand can lead to more competition among buyers. This would put upward pressure on home prices as multiple buyers compete for a limited number of homes.
"In Silicon Valley, which continues to experience a serious housing shortage, home price increases could offset affordability gains from lower mortgage interest rates," adds Giorgi.
Improved housing affordability
According to Evangelou, any change in mortgage rates and home prices can affect a homebuyer's overall monthly mortgage payment. A one percentage point decrease in mortgage rates can reduce the monthly mortgage payment mortgage rate as much as a 10% reduction in home prices. On the other hand, lower mortgage rates could have a neutralizing effect and cause home prices to rise due to increased housing demand.
More inventory in the market
At lower mortgage rates, buyers at all income levels can afford a greater number of listings, which can expand their choices. Expected rate reductions could encourage more homeowners to sell, which would increase housing inventory. Additionally, the Fed rate cut can have a positive effect on the construction industry. Lower borrowing costs would make it cheaper for developers to finance new projects, which could lead to increased construction of new homes.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.