It Will Take More Than Lower Mortgage Rates for a Housing Rall

The Federal Reserve is hoping that its latest interest-rate cut will help keep the economy safely at cruising altitude. But don’t expect it to provide much of a lift to the housing market.
Housing is one of the pathways by which Fed policy produces results. When the central bank cuts interest rates, it encourages people to buy houses (since mortgages are cheaper) and builders to ramp up construction (since demand is strong and borrowing is easier). Those decisions then ripple through the economy, as people buy furniture, builders hire workers and brokers cash their commission checks.
But housing isn’t the engine it once was. The sector is a smaller part of the economy than before the financial crisis, and a smaller share of Americans are homeowners. And with rates already low, it isn’t clear that a further cut by the Fed will do much for housing — if it lowers mortgage rates at all. (More about that in a minute.)
Interest rates still matter for housing. The Fed’s first two rate cuts this year helped stabilize the housing market, which had been heading for a major slump. On Wednesday, the Commerce Department said that construction added to gross domestic product in the third quarter after six quarters of contraction. And lower rates could give another jolt to a refinancing boom that has injected billions of dollars into the economy in recent months.
But few economists expect the housing market to take off in response to this week’s rate cut, because rates aren’t what was holding back housing in the first place. Instead, they point to other factors.  
Interest rates don’t matter if no one will give you a loan in the first place. And a lot of would-be buyers are in that situation.  After the housing bubble burst over a decade ago, banks and other financial institutions became far more cautious in their lending, partly because of new federal rules meant to discourage risky loans. No one wants a return of the bubble-era “liar loans,” for which borrowers were allowed to state their income without verification. But some argue that the pendulum has swung too far the other way.
The typical home buyer today has a FICO credit score of 741, compared with 700 before the housing crisis, according to data from the Urban Institute. Hardly any buyers have a score below 650. Other measures of affordability likewise show that lending standards have loosened a bit in recent years but remain tighter than in the early 2000s, before the subprime lending boom..

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