As an avid tennis player, I seek out every possible way to improve my game. Sometimes those advantages are self-controlled, such as increased practice time, improved diet, or new equipment. But often enough, opportunities will present themselves in unexpected and random places, such as a friendly umpire, favorable weather conditions or a distracted opponent.
Such is the case with Miami residential real estate, which in recent months has been given two extraordinary boons from the federal government, in the form of lowered interest rates and expanded rules for FHA (Federal Housing Authority) condo financing. While my colleagues and I always appreciate the many natural advantages that come with selling Miami real estate, these new policy changes feel a bit like being given Roger Federer’s serve and Serena Williams’ forehand.
Before I explain why, some background: In July, for the first time in a decade, the Federal Reserve cut interest rates by one-quarter of a percent. On Sept. 18, it cut rates another one-quarter percent, bringing it down to a range of 1.75 to 2 percent. Why make these cuts now? According to CNN.com, “…the U.S. economy presents a mixed picture. U.S. consumers have continued to make big purchases as they enjoy a 50-year low in unemployment and an uptick in wages, but unresolved trade negotiations between the United States and China have dampened business investment and slowed the manufacturing sector.”
▪ Rate cuts motivate prospective buyers: While mortgage rates are not directly impacted by interest-rate cuts like this year’s, they are affected by some of the same dynamics. The average rate on a 30-year fixed-rate mortgage last year was 4.6%; as of mid-September it was at 3.56%, according to Freddie Mac.
What does this mean to the average homebuyer? I asked my colleague Raul Alvarez, a loan officer with Paramount Residential Mortgage Group, who informed me that a drop from 4.6% to a 3.56% on a $250,000 30-year loan would lower the monthly payment by about $150, while on a $500,000 loan the monthly payment would drop by about $300. “The significance of an interest rate drop in both scenarios is that the money being saved is pure interest,” adds Alvarez. “In both scenarios the yearly savings is close to the amount the borrower will pay for their homeowner’s insurance, making the total cost of ownership much less.”
Are those benefits enough to motivate a renter to become a buyer, or an investor to get off the sidelines? Nationally, the answer was yes, as the AP recently reported that , “…U.S. home sales rose 1.3% in August to the highest level in 17 months, as mortgage rates near historic lows have spurred a rush of home-buying… the best performance since March 2018. Sales have increased 2.6% from a year ago.”
I have seen this impact locally as well. Just recently, a prospective buyer on one of my listings came in with an offer $5,000 below my seller’s hard-line final price. When I spoke to the buyer’s agent, I suggested that they explain to their client that with today’s extraordinarily low interest rates, the buyer would only be paying an additional $22.45 per month (based on a 3.5% interest 30-year loan) if they just increased their offer by that $5,000 difference. Did they really want to miss out on their new home over the cost of about $0.75 per day? Thankfully, the answer was “no” and a deal got done.
It doesn’t take a math whiz to see the correlation between drops in interest rates and rises in home sales. As The New York Times reported earlier this year, “If you borrowed money to buy a house late last year, you were unlucky — and it cost you. In November, as the Fed neared what appears to have been the end — for now at least — of its slow march of interest-rate increases, the average rate on a 30-year mortgage was nearly 5 percent.”
I have personally worked with many buyers and investors who go from tire-kicking to document-signing in order to lock in desirable rates, even when they drop just a little bit; which appears to be the intent of the Fed. As the Times article goes on to mention, “By moving to reduce rates…policymakers are trying to reduce the risk that millions of Americans could be thrown out of work. They are trying to ward off the prospect of a job-killing recession by giving the economy a little extra boost.” Mission accomplished, it would seem.
▪ FHA opens doors for condo buyers: But Uncle Sam has also promised a second gift for Miami real estate. In August, the FHA announced a policy shift that dramatically loosens rules with respect to condominium loans, opening the door for as many as 60,000 additional loans nationwide. (Specific guidelines for the policy will be announced in October.)
As FHA loans have lower credit standards than conventional loans and only require a 3.5 percent down payment, this is a huge opportunity for the first-time buyers and low- to middle-income borrowers for whom the policy is intended.
It also represents a unique opportunity for a city like Miami, which has a backlog of unsold new condominium units. How is this so, you might ask, when most of Miami’s newer condo units are priced beyond the reach of a typical FHA loan-seeking buyer? Because for Miami’s current condo-owners who may be interested in upgrading to these newer, more expensive units (but are struggling to sell their current residences), the pool of prospective buyers will get larger.
These lower rates and loosened FHA rules are by no means panaceas for our market, which continues to find its footing. But for smart investors, home buyers, and brokers who maximize the opportunities they present, it could be the very tool to help them win their next real estate game, set and match.
Master Broker Anthony Askowitz is the broker-owner of RE/MAX Advance Realty in South Miami and Kendall. He can be reached at 305-807-9079 and email@example.com.
The opinions expressed of the writer do not reflect the views of the Miami Herald.