What does it mean to be a “force multiplier?” In the military, it could mean combining infantry, armor, and air support to boost the overall effectiveness of a combat operation. In sports, it could mean leveraging a team of four players to generate the outcomes of 16. In business, power tools help a carpenter do significantly more work than if they used hand tools to cut wood and secure screws.Interest rate cuts by the Federal Reserve may be coming, which means a likely uptick in mortgage activity — and that could be a force multiplier for even greater economic activity.A Seller’s Incentive and a Buyer’s SavingsThe first Fed rate cut will likely be about 0.25% and could be as early as this month. Over the next year and a half, cumulative rate cuts could be up to 1%. This trend has the potential to markedly steady the housing market's “wild ride” of the last few years.Sellers will be more likely to put their homes on the market knowing that more buyers will be out there. That would boost more inventory into a “starved” market where many would-be sellers stayed away.In his midyear 2024 forecast, NAR chief economist Lawrence Yun says that inventory is starting to tick up, lending weight to his prediction that total home sales will begin to rise again and reach pre-COVID levels by 2026 as interest rates start to fall.Of course, buyers stand to gain as well. They could save a good chunk of money as mortgage rates dip. To see the impact of a rate cut, CBS News provided an example in the form of a $398K mortgage with a 6.86% mortgage loan interest rate, which is the current average home price nationwide. The total interest paid would be $541,812, with a total loan cost of $939,812. With the cumulative rate cuts up to 1%, that homebuyer could save more than $93K in interest over the life of their loan. Moreover, Fed rate cuts will also likely further boost refinancings of both residential mortgages and commercial mortgages. That increase has already started. According to the Mortgage Bankers Association, refinance applications for mortgages shot up 35% in the first week of August, compared to the prior week. Compared to the same time last year, the increase was 118%.Economic Impact of Rising Home Sales
While lower mortgage rates may not seem ideal for lenders at first glance, they can trigger a positive ripple effect across the economy. NAR’s real estate forecast summit calculates the total economic impact of a single home sale on the state economy every year, which also includes expenditures related to home construction, real estate brokerage services, mortgage lending, and title insurance — creating a broader economic boost that could ultimately be advantageous for lenders as well. Along with the services required for the actual home sale, new homeowners tend to purchase new furniture, décor, and appliances; hire professional services to repaint or maintain landscaping; and replace fixtures in the home such as windows, bathrooms, kitchens, and flooring. In 2023, each home sale at the median price range generated roughly $124,800 of economic impact. For some states, the impact is even higher. All told, the real estate industry accounted for $4.9T, or 17.8%, of 2023’s gross state product.This major boost will include a significantly positive impact on small businesses, experts contend. The more spending small businesses see from new homeowners, the more staff they’ll need and the more revenue they’ll generate. Lowering interest rates will reduce their borrowing costs, improve their cash flow, and give them more money to invest in growth. All of this bodes well for the financial institutions that serve them.Opportunities for Your InstitutionWhile a drop in mortgage rates results in less income from the loan, there are still some new opportunities for lenders to look forward to as a result of the potential change in the housing market.
While lower mortgage rates may not seem ideal for lenders at first glance, they can trigger a positive ripple effect across the economy. NAR’s real estate forecast summit calculates the total economic impact of a single home sale on the state economy every year, which also includes expenditures related to home construction, real estate brokerage services, mortgage lending, and title insurance — creating a broader economic boost that could ultimately be advantageous for lenders as well. Along with the services required for the actual home sale, new homeowners tend to purchase new furniture, décor, and appliances; hire professional services to repaint or maintain landscaping; and replace fixtures in the home such as windows, bathrooms, kitchens, and flooring. In 2023, each home sale at the median price range generated roughly $124,800 of economic impact. For some states, the impact is even higher. All told, the real estate industry accounted for $4.9T, or 17.8%, of 2023’s gross state product.This major boost will include a significantly positive impact on small businesses, experts contend. The more spending small businesses see from new homeowners, the more staff they’ll need and the more revenue they’ll generate. Lowering interest rates will reduce their borrowing costs, improve their cash flow, and give them more money to invest in growth. All of this bodes well for the financial institutions that serve them.Opportunities for Your InstitutionWhile a drop in mortgage rates results in less income from the loan, there are still some new opportunities for lenders to look forward to as a result of the potential change in the housing market.
- New accounts from homebuyers. As homebuyers relocate, they’ll likely need to transfer their financial accounts to a local institution. This can increase your deposit base, especially if any of the homeowners have businesses like freelancing services or ecommerce stores they need accounts for as well.
- New services from business customers. As local businesses benefit from increased spending, they might make good candidates for new products such as loans to expand their business, product lines, or staff. Businesses could also simply just have more to deposit into their accounts with you, meaning access to more liquidity.
- Deepening relationships with referral promotions. Offering bonuses and temporary increases in interest rates for new referrals is a great way to leverage the customers who already count on you and incentivize them to send newcomers your way.
- Hedging existing loans may create opportunities. While Fed Funds and other short-term rates are expected to drop, forward swap curves for the end of 2024 and beyond show that expected five- and 10-year rates will remain stable.
Fed rate cuts would be a win-win scenario — a force multiplier across the entire US economy. By strategically leveraging the economic boost from increased home buying and local spending, financial institutions can turn the challenge into an opportunity for growth and diversification.
