Housing not immune to coronavirus risks despite cheap mortgages – Daily News

on Mar3
by | Comments Off on Housing not immune to coronavirus risks despite cheap mortgages – Daily News |

Cheap money can’t always save housing.

The Federal Reserve, in a surprise move on Tuesday, March 3, cut the central bank’s key interest rates it controls by a half-percentage point. It was the first emergency action, and the largest cut, since the financial crisis of a decade ago.

The cut shows the Fed is taking seriously the economic risks created by the global coronavirus outbreak. And that cheers some investors.

But the fears of a global pandemic and its potentially harsh impact on the world’s business climate won’t be easily soothed by cheaper money.

And while the housing market may be an early benefactor of cheaper money, the rate cut does little for the longer-term challenges the coronavirus poses. Here are some answers to questions you may be pondering.

Q. Won’t this move make for cheaper mortgages?

A. It definitely will. Expect mortgage rates to remain in the historically low 3% range for most of this year.

This kind of cheap money will be a huge boost to folks who are either in the market to buy, on the fence or looking to refinance their home.

And sellers will find better-qualified house hunters with extra borrowing power, thanks to cheaper rates.

Q. So what’s the problem with a rate cut?

A. The plus is also a minus. Cheaper money means home prices will likely rise as house hunters compete for the limited supply of inventory with extra buying power.

Assume mortgages go from 3.75% to 3.25%. That translates to roughly 6% more money available to be borrowed for the same amount of income.

That’s the kind of upward price push the Fed’s action could create.

Of course, that’s good for sellers as long as the same cheap-money pattern doesn’t make their next home too pricey.

Bottom line: Much of the “affordability” benefit the housing market gets from the rate cut could be lost to price appreciation.

Q. Aren’t low rates good for the broader economy?

A. Usually, yes.

In a typical period of slowing economic growth, a rate cut helps motivate employers to invest in facilities, products and staff.

But coronavirus is different.

The outbreak has damaged the world’s “supply chain” — the mechanism that builds the goods we buy, stocks our stores and brings supplies to factories. China’s giant manufacturing industry is badly crippled as the nation battles the virus outbreak.

And this key cog in the supply chain won’t come back to full strength anytime soon regardless of where interest rates go.

As a result, for example, West Coast port traffic, a key measure of trade, has is cut by one-fourth. Don’t forget tourism. This major California industry is also suffering from canceled conventions, diminished business travel and consumer fears about international trips.

Q. Trade? Tourism? That’s not my employer.

A. Remember the three keywords of real estate: Jobs. Jobs. Jobs.

The Fed can only lower rates. It can’t make employers hire or keep existing staff.

The loss of trade and tourism activity means Californians will lose work hours, commissions, bonuses .. and/or get laid off.

Those cutbacks certainly can translate to less cash to spend at shopping centers and restaurants. Perhaps those business owners, too, will trim their budgets and staff, no matter how low rates go.

And how about businesses that support trade, tourism and retail operations — if they can get supplies at all? You can see how this could spiral outward from there.

Do not forget that without a job, or severely reduced pay, you probably can’t buy a home. Or even rent one. No matter how cheap loans are.

Q. So you’re saying housing’s doomed?

A. No. Just that cheap money can’t cure all ills.

Housing relies on consumer confidence. That’s often tied to employment prospects. Up until the coronavirus outbreak, things look great for workers.

Yes, the full economic impact of coronavirus is a huge unknown. But the Fed’s dramatic action certainly confirms there are serious business risks out there.

Uncertainly, especially when it comes to betting your life savings on real estate, is not a good thing.

Previous postHomebuilder stocks jump on news of a rate cut Next postLAUSD Outlines Precautions Against Coronavirus – NBC Los Angeles

Los Angeles Financial times

Copyright © 2022 Los Angeles Financial times

Updates via RSS
or Email