Home Market Watchers: Fed Decision Unlikely To Offer Lift
It appears unlikely that the Federal Reserve's surprise decision to continue buying $85 billion in bonds each month will jumpstart the Central Massachusetts housing market, several Realtors and bankers said.
The interest rate on the average 30-year home mortgage crept up from 3.35 percent in early May to 4.57 percent in mid-September, in anticipation of an announcement by the Fed to begin reducing its monthly purchase of mortgage-backed securities and treasuries.
But that announcement didn't come. Instead, the Fed cited government spending cuts and a still-sluggish economy in its decision to continue with the same level of what's known as “quantitative easing.”
In response, the 30-year mortgage rate fell 35 basis points over the past three weeks to 4.22 percent, hitting its lowest levels since mid-June.
What does that mean for the real estate market? Not too much, most analysts say.
“The housing market isn't going to be influenced by small movements in the mortgage rates because there isn't much of a market right now,” said Guy Webb, executive director of the Builders Association of Central Massachusetts.
Experts: Rates Remain Low
Most experts pointed out that rates continued to be at historically low levels, even after this summer's uptick.
Interest rates have a limited effect on the overall cost of purchasing a home, said Nelson Zide of ERA Key Realty in Framingham. He said a 50 basis-point increase in rates would only cause the monthly payment on an average Central Massachusetts home to climb by $30 or $40.
“Are you really not going to buy a house because of 30 or 40 dollars?” he asked rhetorically.
Other experts anticipate more of a response.
“Anytime rates fall, buyers get excited,” said Diane DeCiccio, regional vice president for the Massachusetts Association of Realtors. “Every half percent or quarter percent affects their mortgage payment.”
Applications for U.S. home loans spiked 5.5 percent during the week the Fed announced its decision to delay tapering, the Mortgage Bankers Association (MBA) found. But the very next week, national mortgage application activity fell 0.4 percent.
Bankers and Realtors were split over whether climbing interest rates over the summer slowed the Central Massachusetts home-buying market. But there was little argument over what higher rates did to refinancing activity.
“When rates went up, the refinance market came to a screeching halt,” said Brian Thompson, CEO of Worcester-based Commerce Bank.
But what a sustained dip in mortgage rates would mean for refinance activity is still up for debate.
Commerce is so confident of the housing market's shift from refinance to purchase that the bank largely suspended operations of its home mortgage subsidiary, 1-800-East-West Mortgage, Thompson said. Other bank leaders also didn't expect a rebound in refinance activity with falling rates.
“The rates were so low for so long,” said Lloyd Hamm, CEO of Grafton Suburban Credit Union. “If you had equity ... you already refinanced.”
But Tom Seymour, senior vice president of lending at St. Mary's Credit Union in Marlborough, said there are some homeowners on first mortgages who could benefit from consolidating debt. He expects an uptick in refinancing if mortgage rates continue to drop.
Refinance activity nationwide increased 3.1 percent in the first full week following the Fed's announcement, the MBA found, not long after it hit its lowest levels since June 2009.
Most experts felt the housing market hasn't been held back by rising interest rates, but rather a lack of inventory.
The burst of the real estate bubble left many homeowners underwater and fearful of another housing market collapse, said Tim Warren, CEO of The Warren Group, which tracks real estate.
Median home prices in Central Massachusetts declined every year between 2006 and 2011, Warren said, meaning housing prices would need to climb before many homeowners could sell and profit. Residents typically can't sell at a loss, Zide said, since most of their equity is tied up in their homes.
Even with a 12-percent increase in median home prices over the past year, Warren said the region's average house is still selling for $30,000 less than it did at the peak of the real estate boom in 2005.
The logjam is primarily in lower-end homes, Zide said, where a lack of money and confidence has left residents reluctant to upgrade to larger homes.
Without that, there's not enough affordable housing stock on the market for first-time homebuyers, he added.
Once the employment market stabilizes and first-time homebuyers feel confident their jobs aren't going away, home buying activity will resume at higher levels. But Zide doesn't expect that to happen until at least early 2015.
Home construction in Central Massachusetts is also suffering from a lack of land and expensive regulations, Webb said. A greater supply of new homes would help.
“When home values rise again,” Thompson said, “new home construction will pick up and people will be able to get out of their current homes.” n
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