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March 17, 2020

How will the Fed’s rate cut impact the U.S. housing market amid the coronavirus outbreak?

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Stucco home fed cuts rates Luis Yanez/

The unprecedented scope of the global coronavirus pandemic, hammering markets worldwide, has left U.S. policymakers with little choice but to take extreme precautionary measures.

The Federal Reserve announced Sunday it would slash interest rates to zero, the Washington Post reported. This is the central bank’s most aggressive action since the 2008 financial crisis.

There will undoubtedly be major ramifications for the U.S. housing market in the months to come.

The Fed will purchase about $500 billion in U.S. Treasury bonds and another $200 billion in mortgage-backed securities to stabilize home loans.

With Sunday’s action, the Fed is now expected to maintain low rates until the COVID-19 outbreak is contained.

For the past year, the U.S. housing market has been driven by already low interest rates, marking a promising recovery and a surge in refinancing among homeowners.

Even prior to the coronavirus arriving in the U.S., the housing market was off to a strong 2020, according to Fannie Mae senior vice president Doug Duncan.

“Lenders’ expectations of consumer demand for purchase and refinance mortgages hit survey highs this quarter, with many lenders pointing to favorable interest rates as the engine driving the demand.” --Doug Duncan, Fannie Mae senior vice president

Those rates have now been cut even further.

A flash survey conducted by the National Association of Realtors this month showed that COVID-19 is already having some effect on the housing market, though the low rates are believed to be a beneficial move, MortgageNewsDaily reported.

The two states most heavily impacted by the virus, Washington and California, have seen some decrease in the number of homes available on the market, according to NAR members. Nationwide, however, there have been promising signs that the number of sellers will increase as they can take advantage of lower interest rates.

In the meantime, there are signs that certain practical dimensions of the housing market may change temporarily. Certain locations may see open houses suspended or visitors required to wash their hands or use hand sanitizer.

Fannie Mae’s Economic & Strategic Research Group believes COVID-19 will only bring about a recession if the worst-case scenario unfolds. If the virus can be contained as a result of the short-term measures being implemented to prevent its spread, the overall impact on the housing market could be positive.

In such a fluid situation, predictions are difficult to make with a high degree of confidence. Consumer sentiment may be shaped by larger economic uncertainty that slows down big moves by potential buyers and sellers, even with the enticement of low rates.

At a minimum, the Fed’s action creates market conditions that facilitate the market in a time of many unknowns.