At the recently held Federal Reserve meeting, it was reiterated that the Fed funds rate will stay in the 0-0.25% range for the foreseeable future. The central bank authorities also stated that it will keep on raising its bond holdings, targeting Treasury purchases at $80 billion a month and mortgage-backed securities at $40 billion.
Key FOMC Comments
The FOMC participants projected that there will be no rate hikes until 2022. The projections and Fed comments indicated that the economic downturn caused by coronavirus will not see an early recovery. Therefore, stimulating the economy is imperative now. The Fed anticipates American GDP falling 6.5% in 2020 before rising 5.0% in 2021 and 3.5% in 2022.
The regulatory body expects a gradual improvement in the unemployment rate. For 2020, the rate of joblessness is estimated at 9.3% while for 2021 and 2022, the same is expected at and 6.5% and 5.5%, respectively.
Mortgage Rates to Remain Low
The Federal Reserve rate decisions don’t directly impact the mortgage rates as they do for other products like savings account and CD rates. But the Fed’s actions implicitly influence the rates that consumers pay on their fixed-rate home loans when they refinance or take out a new mortgage.
The Federal Reserve sets borrowing costs for shorter-term loans in the United States by moving its federal funds rate. The rate determines the amount of interest banks pay one another to borrow funds from their deposits at the Fed on short notice. Meanwhile, mortgages tend to track the 10-year Treasury rate.
The still-uncertain outlook for the economy and seemingly low risk of inflation has kept bond yields in check, with mortgage rates following suit and the trend is expected to continue. Per Bankrate, the current 30-year fixed rate is 3.49% as of Jun 11.
Where Does the Housing Market Stand?
The low mortgage rates are a positive for the housing markets. Ultra low rates have been tempting homeowners to refinance their mortgages and opt for refinancing their current loans. Going by the Mortgage Bankers Association’s recent statement, refinance applications jumped 11% last week. The Recent data points also painted an optimistic picture of the housing market.
The recent numbers showed a spurt in sales of newly-constructed single-family homes, which account for roughly 10% of all U.S. home sales. Sales inched up 0.6% in April from the prior month to a seasonally adjusted annual rate of 623,000 units, per the Commerce Department data released on May 26. The April figure beat the economists' forecast of 497,000 by 25.4%.
What Does the Housing Picture Look Like?
Despite the low interest rates, steep unemployment rate and recessionary conditions might dampen demand from the homebuyers. Concerns loom large on the second wave of coronavirus spread and the economic risks it may spark.
A second wave will be devastating for the economy as it will not only heighten consumer fears but also worsen the economic conditions, which already went downhill when the pandemic peaked. Moreover, the housing industry will not be immune to this market turmoil. Also, other challenges prevalent in the construction industry including limited availability of loans for homebuilders, labor shortage and scarcity of building materials will weigh on the space.
Against this backdrop, we recommend some stocks in the housing industry for investors to check out, which are DR Horton Inc. (DHI - Free Report) , KB Home (KBH - Free Report) , Lennar Corporation (LEN - Free Report) , MDC Holdings Inc. (MDC - Free Report) and Toll Brothers Inc. (TOL - Free Report) , each currently carrying a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
5 Stocks Set to Double
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