Interest Rate Cuts: Predicting the Implications on Building Materials

After a multi-year wait, the Federal Reserve finally made its first rate cut last week a reduction of 50 basis points to the federal funds rate.  For those of you who follow the stock market you saw that this had enormous implications in the global economy.  There are many dominoes that fall after a large macroeconomic shift like this, and almost all of them are good for the building materials market.  Here’s what we think FAMCO and other companies will enjoy in the coming months:

1. Lower Mortgage Rates Will Increase both New and Existing Home Sales

• We are in a market with record low housing affordability and record high demand.  Any downward shift in the cost of buying a home should unlock significant activity, leading builders to increase RNC activity and for sales of existing homes to increase.  Any increase in homeownership benefits us all.

2. Increased Homebuyer Demand

• Demand is already high, but as borrowing becomes cheaper, demand for homes will rise even with record high housing prices in many markets.  Many families are compelled by a variety of life circumstances to buy a home – the birth of a child, a job change or other life circumstance – and this will pull them off the sidelines faster.  In turn, this will spur builders to apply for more permits or start building against previous permits already awarded.

3. Revitalization in Depressed Markets

• With an increase in affordability, any increase in demand can have a beneficial effect in depressed markets where there is a lot of inventory (Texas and Florida, to name a few) but the borrowing costs have been too high.  These large but somewhat stagnated markets should see a pickup as opportunistic and motivated buyers can make their next housing move.

4. Boost in Refinancing Activity

• Lower interest rates make refinancing existing mortgages more attractive. Homeowners can reduce their monthly payments by refinancing at a lower rate, freeing up disposable income. This can also lead to increased consumer spending as homeowners use the savings for other purchases or investments in their homes such as new roofs or HVAC systems.  Just today, mortgage applications hit a 2-year high just a week after the rate cut announcement.

5. Increased Home Construction

• Lower borrowing costs encourage builders and developers to invest in new housing projects, as financing becomes more affordable. While inflation has significantly increased the cost to build a home, the ability to finance projects at a lower cost will allow RNC builders to start more projects without sacrificing profitability or having to offer excessive price cuts.  Builders are very efficient and profitable right now – just look at their stock prices – and they’re happy to build homes at any rate so long as they can continue to enjoy high prices and the profits that come with them.

The consensus among economists who study the Federal Reserve is that we’re not in an era of continued rate cuts, possibly seeing as much as another 50 to 100 basis point reduction in the next year.  If that comes to pass that should help keep our industry busy in the normally slower month of winter and early spring and set us up for a strong start to 2025.

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