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What Fed's Hasty Rate Cut Means for Housing Amid Corona Scare

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Shares of major homebuilders gained on Mar 3 after the Fed announced an emergency rate cut of 50 basis points to a range of 1-1.25% amid growing panic over the coronavirus outbreak.

Although major indices finished sharply lower on Mar 3, shares of Meritage Homes Corporation MTH, Lennar LEN, PulteGroup PHM, D.R. Horton DHI, KB Home KBH and Toll Brothers TOL spiked 3.3%, 2.6%, 1.5%, 1.4%, 1.1% and 0.1%, respectively. The iShares U.S. Home Construction ETF (ITB - Free Report) rose 0.6%. Meanwhile, the Dow Jones Industrial Average lost 2.94%, the S&P 500 tumbled 2.81% and the Nasdaq finished 2.99% down.

In a meeting with reporters, Fed Chairman Jerome Powell said, “The fundamentals of the U.S. economy remain strong.” However, “the spread of the coronavirus has brought new challenges and risks. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”

A Boon or Bane for Housing?
The outbreak has fueled concerns over shrinking supply in the housing market. As China’s manufacturing output is expected to decline with factories temporarily sidelined, U.S. building product supply chains are likely to get affected. Notably, nearly 30% of products used in U.S. building construction are imported from China. Hence, any disruption in the supply chain may impact builders’ ability to deliver in time (read more: How Coronavirus Can Shake the Thriving U.S. Housing Sector).

While the broader market has been volatile amid mounting global panic over the economic impact of the virus, housing is expected to remain shielded. Presently, the economic backdrop for U.S. housing is favorable as declining interest/mortgage rates, low unemployment and increasing wages are somewhat offsetting the prevailing headwinds. Moreover, the increasing shift of millennials from their parental homes is driving demand for new homes.

Low interest rates have already been pushing home sales higher. Existing home sales rose 9.6% in January to a seasonally adjusted 5.46 million units from a year ago, the NAR said. This marked the second straight month of year-over-year growth. Meanwhile, sales of newly constructed single-family homes reached a 13-year high in January.

Also, a few market experts are of the opinion that the latest rate cut may help the U.S. economy somewhat by boosting the housing market. Moody’s Analytics Chief Economist Mark Zandi said that the rate cut is expected to aid the domestic economy, in part by boosting the housing market and helping businesses that require to finance their operations in the short term.

Following the rate cut, the 10-year Treasury yield dropped to a record intraday low and homebuilders have every reason to cheer. The yield on the 10-year Treasury dropped to an all-time low of 0.9587% on Tuesday following the rate cut from the Fed. Mortgage rates tend to follow the pattern of the Treasury yield and lower mortgage rates will ultimately benefit homebuilders as well as homebuyers. Mortgage News Daily’s survey showed that 30-year fixed-rate mortgages dropped on Monday to 3.13%, on average.

As the Fed's hasty rate cut has triggered an incredible drop in Treasury bond rates, mortgage rates are likely to drop even further and open up more refinance opportunities for homebuyers, thereby sustaining the housing momentum.

Now, the extent of the virus impact needs to be monitored. Will the latest Fed rate cut aid the U.S. housing sector amid the global spread of coronavirus? After all, the extent of the virus impact is subject to the capability of U.S. builders to substitute products from China with supplies from domestic or international vendors.

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