If the Federal Reserve moves ahead with an anticipated interest rate cut next week, tepid South Florida homebuyers are likely to vacate the sidelines and start shopping, observers say.
But Sheila Bair, the former chair of the Federal Deposit Insurance Corp., is not so sure a reduction is advisable.
The onetime FDIC leader who helped steer the U.S. banking system through the housing crisis of 2008 told a virtual conference sponsored by Optimum Bank of Fort Lauderdale on Thursday that Federal Reserve Chair Jay Powell should dial back recent dovish comments on inflation. She also said the central bank should “stand pat next week” when the Federal Open Market Committee is scheduled to discuss its next move.
“Most importantly, it is still too soon to declare victory over inflation,” Bair told an online audience of several thousand people.
“The worst-case scenario for both banking and the U.S. economy is a stagflation scenario where the economy slows but inflation and interest rates have to remain high,” she asserted. “You must avoid this scenario at all costs.”
Bair’s remarks came after rates for 30-year fixed rate home mortgages fell again for the sixth straight week, this time to a low of 6.29% in the week ended Sept. 6, according to the Mortgage Bankers Association.
In addition, the U.S. Labor Department reported the consumer price index for August rose 2.5% from the year before, dropping from 2.9% in July. The latter adds up to a potential rate cut when the Fed meets next week.
“Yes, commodity prices came down providing a headline CPI rate of 2.5%,” Bair acknowledged. But, she added, commodity prices remain “highly volatile, particularly energy,” core inflation remains above 3%, housing inflation has been “persistent” and “lower mortgage rates will only exacerbate supply-demand imbalances.”
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She added that a recession does not appear to be imminent as the labor market, while slowing, “still appears to be in pretty good shape.”
“This looks like a soft landing to me and I suggest caution against the Fed doing anything too drastic,” she said. ” And clearly while lower rates will give a boost to Wall Street, will the benefits trickle down to Main Street?”
High central bank interest rates have aggravated housing affordability problems in Florida and around the nation, a byproduct of central bank efforts to tame rapid inflation. The effect of higher central bank rates, while not having an immediate impact on mortgage rates, eventually made it more expensive for people to borrow to buy a home and for builders to finance construction.
Bair said any cut should be by a quarter point at the most, adding that Powell, the Fed chair, should respond to what economic data shows, not to financial market pressures.
“His rate-cutting finger may be a bit itchy, but it’s better to under-promise and over-deliver later on rate cuts if the data supports it,” she said.
‘For every win, a loss’
Rebel Cole, a finance professor at Florida Atlantic University’s College of Business who served as one of the Optimum Bank panelists, acknowledged in a post-conference interview that when borrowing, rate cuts give many homebuyers the ability to afford a bigger house.
“A 1% drop has a massive impact on the monthly payment,” he said. “That’s a good thing for everybody, especially for people in fancy house like me.”
“But for every win there is a loss,” Cole said. “As more people come back into the market, that’s going to put more pressure on housing prices.”
It is also unclear whether a quarter-point cut next week and another later this year “is really going to move the needle that far,” he said.
Cole worries that profligate spending by the U.S. government, which is now more than $335 trillion in debt, will neutralize any monetary moves.
“It’s really a tight wire the Fed has to walk,” Cole said. “You can’t run monetary policy in isolation from fiscal policy.”
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Inflation still hurts small business
Bill Herrle, executive director of the 10,000-member National Independent Business Federation-Florida, said the chief concern for his members is inflation, followed by the tight labor market.
“Inflation impacts them in energy costs, costs of goods sold and raw materials,” he said. “Generally does it leave less capital to invest in the business? Absolutely. That doesn’t mean they fill the gap with loans. Typically it has a suppressing effect on a business owner’s desire to expand.”
Businesses are still competing for talent that’s in short supply, Herrle added.
“We’re trying to hire workers. What do we do when they’re not available? We increase wages,” he said. “For small buisness owners, wages have been increasing at a 30-year record-setting pace.”
Avoiding a regional slowdown
In separate interviews, real estate analysts, economists, brokers and small business advocates all said there is an appetite for more economic expansion in Florida that is being sourced through a continuing flow of relocations by out-of-state businesses and residents.
Brokers are also seeing ownership turnovers in existing businesses and the start of new ones.
“Florida is slowing, but it’s still very strong and the labor market is extremely tight in Florida relative to the national market,” said Sean Snaith, director of an economic research center at the University of Central Florida in Orlando.
Mike Pappas, CEO of the The Keyes Family of Companies, said South Florida’s supply of single-family homes is improving.
“There is more selection and more opportunities today and a more balanced market,” he said. “There has actually been more listings on the market with price reductions. You’re seeing people become more reasonable. We’re not seeing the double-digit price appreciation we saw during the COVID surge. We’re back to a more normal single-digit appreciation.
“We are seeing first time homebuyers are coming back into the market at a greater percentage,” he added.
But Ken Johnson, a longtime South Florida real estate economist who recently moved from FAU to the University of Mississippi, predicts a cyclical action of slowly declining mortgage rates that will trigger buying activity, which will warm up the housing market and, in turn, inflation.
“The Fed will get hawkish,” he said. “You will have this saw-tooth movement in rates going down.”
“We’ll work our way back to 4.5% to 5.5% 30-year mortgage rates,” he said. But buyers shouldn’t expect a return to 3% as “it doesn’t make sense.”
And, in fact, the recent downward trend in rates is generating interest among people who have been on the sidelines, said Diane Mastay, mortgage director at Tropical Financial Credit Union.
“Maybe it’s just been all the talk and expectations,” she said. “It always piques people’s interest when the Fed cuts the rates. If people were looking to purchase and wait on the sidelines, we get a lot more inquiries when this happens. That’s a good thing. We want to see the market get to where it used to be — people buying. We are starting to get an uptick in applications.”
Tropical, though, is not hearing from people seeking to refinance as many customers are holding mortgages at rates that are much lower than they are now.
Timothy Terry, president and CEO of Optimum Bank Holdings, said the Fort Lauderdale institution has been “pretty active on the lending front” particularly with entrepreneurs who are seeking loans supported by the Small Business Administration.
“They are eternal optimists,” he said. “For us, probably the main SBA loans we see right now are people buying franchises. These are people currently working and acquired some net worth and they want to borrow some money.”
Andrew Cagnetta, CEO of Transworld Business Advisors, said his South Florida brokerage firm has seen a rebound in the sale of businesses since COVID slowed activity.
“We do see things picking up now,” he said. “I think everybody feels better. The SBA loan program has been very helpful for small business.”
Deals are capped at $5 million.
“No. 1 always for us is the hospitality industry” such as restaurants, Cagnetta said. Then comes construction businesses, and then service business such as landscaping, hair salons or pool services. Healthcare businesses such as physician practices, laboratories and home care agencies are also in demand.
In the commercial real estate and construction fields, lending continues to be a conservative proposition, according to a South Florida broker and lender.
“I know in the multi-family sector, many developers are sitting on terrific sites,” said Tere Blanca, founder, chairman and CEO of Blanca Commercial Real Estate. “There seems to be a wait-and-see approach.”
The office sector “is very challenging to underwrite because of the cost of construction and the high interest rate environment.”
Although there are “pockets here and there” containing substantial office vacancies, South Florida is continuing to benefit from inbound migration and stable businesses occupying the majority of spaces.
But loans on many commercial properties are coming due this year and next and are in line to be financed at higher rates. And banks are being more “choosey” about what projects they will finance to build, said Ben Jacobson, principal of Forman Capital in Boynton Beach.
“There are banks that are still active,” he said. “What will banks do once these rates change? I don’t think anyone knows. Does that solve all of the problem loans on their balance sheets? No, not really. They still have to contend with that.”
As for any change in interest rates, he said. “I don’t know you are going to see meaningful change yet. It’ll be more of a Pyrrhic victory.”
