Brief window for refinance boom expected following the rate change, expert says.

In a significant shift from its previous monetary policy stance, the Federal Reserve announced Wednesday that it would lower its fund rate by 50 basis points to a range of 4.75% to 5%.  

The move comes as concerns grow over slowing economic growth, rising unemployment rates and external pressures from global markets. 

“The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” the Fed said in a press release.

The Fed has raised interest rates multiple times in recent years to combat historically high inflation. However, with inflation now under control and staying close to the Fed’s 2% target, other economic challenges have come to the forefront. 

The US economy has shown signs of slowing down in sectors such as manufacturing, housing, and consumer spending. Meanwhile, unemployment rates have seen a modest uptick, raising concerns about long-term growth prospects. Additionally, ongoing geopolitical tensions and uncertainty in global markets, particularly in Europe and China, have contributed to economic headwinds. 

What the experts are saying 

Tyler Nguyen, the founder and President of Bluegrey Mortgage, expects a brief window for a refinance boom following the rate change, predicting that by the “third quarter, we’ll likely see a fallout.” 

This anticipated market shift, however, comes with its own set of challenges. The issue of affordability, particularly for first-time buyers, has been a longstanding problem.  

Even as mortgage rates fall and housing supply grows in some regions, 2024 will see the slowest pace of sales since 1995, according to Fannie Mae’s Economic and Strategic Research (ESR) Group. 

But with lower rates, this dynamic could change. Vice President Kamala Harris’s proposal of a $25,000 rebate for first-time buyers is seen as a positive development, as it addresses the “cash to close aspect.” This, combined with the lowering of interest rates, could help ease the monthly payment burden for many buyers.  

“I think the biggest problem for first-time homebuyers in the past two years is that monthly payment rates were so high, which created issues for clients who weren’t comfortable with that monthly payment,” Nguyen explained.

“Sometimes it was actually cheaper for clients to rent than to buy, so with lower interest rates and options for down payment or monthly payment assistance from the government, clients can make a more personal decision.”    

Impact on the mortgage industry 

Nguyen is pragmatic about the impact lower rates will have on investors. He acknowledges that the reduced interest rates will lower monthly payments, making homeownership more attractive than renting. However, he pointed out that “the rental market has been teeter-tottering” in regions like Tampa Bay, Florida, where rental values have declined slightly after years of sharp increases.  

“When interest rates are lower, monthly payments also get lower. So of course, the rental and home ownership markets are going to change; they’re going to fluctuate,” Nguyen says.  

For investors, the key concern remains cash flow. Many were operating at a loss, “banking on the appreciation of the property in the next few years.” But with interest rates going down, Nguyen believes there will be new opportunities.  

“Investors are banking on the appreciation of property in the next few years. But now, with the interest rate lowering, I think there’s opportunities for investors to get returns at a better interest rate,” he says.  

The impact of lower rates on mortgage originators is another critical factor. While increased volume from refinancing might seem like an advantage, the pressure on profitability cannot be overlooked, with mortgage brokers like Bluegrey having to compete on rates, which means tighter margins.  

“It’s going to be more competitive; we make less money, we have to compete with the best rate to offer the client, and when it comes to that, we make less money, and we have to close more deals; it’s a combined thing now,” Nguyen said.  

He stressed that even smaller deals, such as home equity lines or refinance cash-outs, contribute to the overall numbers and help balance out the reduced profit margins. 

Looking ahead, Nguyen foresees increased competition among buyers if rates continue to drop, drawing parallels to the highly competitive 2021 market where multiple offers were the norm. 

“It’s going to be harder to obtain to win a deal when you make an offer,” he said. 

His advice to potential buyers is straightforward: “Right now is the time to buy, while the market’s still soft.” Nguyen said that buyers should take advantage of the current conditions, noting that they can always refinance later to secure a better rate.  

Nguyen also underlined the importance of being proactive and leveraging the opportunities presented by lower interest rates, as they create potential for savings through refinancing. This goes hand in hand with the increased demand for home equity lines and refinance cash-outs, as clients seek to consolidate debt, purchase additional properties, or even open businesses. 

By Chris Davis, Lauren Johnson18 Sep 2024