Waco builders say Fed rate cut may stimulate local construction

The Fed's recent half-percent interest rate cut may already be stimulating Waco-area housing construction, a good thing if the boom does not become so frenzied that the marketplace becomes skewed, locals with a stake in homebuilding said.

"It will, and already has," said custom homebuilder Scott Bland, asked if the Greater Waco market has reacted to the Federal Reserve's action in September.

Bland said people in the industry anticipated the cut back in late July and early August, and hit the ground running when the Fed made it official.

The Federal Reserve on Sept. 18 implemented its first rate cut since March 2020, lowering the target for the federal funds rate by 50 basis points to a range of 4.75% to 5.0%. Fed rate cuts typically lower borrowing costs for big-ticket items, including mortgages, though some experts caution that affordability could fuel demand, which would drive home prices up again.

The Fed raised the rate 11 times in 17 months to battle inflation.

Bland said locally, slumbering subdivisions are rousing from sleep, having become dormant as builders avoided assuming high-interest debt to build on their lots amid consumer balkiness for like reasons.

Ken Cooper, with Cooper Custom Homes, said speculative building slowed due to the increased commercial rate on construction loans.

"The higher mortgage rates have also slowed the custom home startups," Cooper said by email. "If interest rates drop much, there will be a bit of a feeding frenzy. Lumber prices are very low compared to three years ago, but the mills are cutting back on production because prices are down.

"Word is that beginning with the new year, prices will jump by double to make up for the losses."

Bland suggests now is the best time to build in a long time, as builders find themselves in a sweet spot between falling interest rates and "very, very stable material costs, which is pretty nice."

He said prospects he spoke with six or eight months ago are showing renewed interest in proceeding with home construction.

"They're saying, 'Let's get this thing going, get this home priced up,'" Bland said.

He said would-be new clients also are calling his number.

The commercial side also is welcoming falling interest rates.

"The Fed's rate cut will make borrowing more affordable, which could move some commercial projects forward, particularly in high-demand sectors like industrial and multi-family," according to a statement from Rogers-O'Brien Construction, which is building the new Waco High School.

"However, material costs and ongoing labor shortages continue to pose challenges, so we're unlikely to see an immediate boom," the statement says. "On the residential side, lower mortgage rates may boost buyer demand, but builders remain cautious due to rising costs and market uncertainty.

"Overall, it's a positive step, but we don't expect a major surge just yet."

Disciplined Investors President Todd Stoner said the Fed telegraphed its rate cut, but suspense mounted over whether it would slice one-quarter or one-half a percent. The Fed ultimately went with a half-percent cut.

"They decided to move more quickly towards the neutral rate which doesn't stimulate or dampen the economy," Stoner said by email. "Because inflation has dropped so much and labor market growth has slowed in the last few months, the half-a-cent cut seems appropriate."

Stoner said he believes Federal Reserve Chair Jerome Powell makes decisions based on how he will be viewed in history.

"He will be criticized for not raising interest rates soon enough when inflation started to spike," Stoner said. "His prediction that inflation was 'transitory' will haunt him since it kept rising. To avoid going down in history along with Fed Chair Arthur Burns that let inflation get out of control in the 1970's, Powell sharply raised rates in 2022 and 2023.

"Now, Powell seems afraid the Fed will keep rates too high for too long, pushing the economy into a recession. Some people are calling this rate cut 'insurance' against a recession."

Stoner said he doubts the latest rate cut will fuel inflation.

"The job market has cooled, and wage increases will be more moderate," he said. "Lower income consumers have gotten squeezed and are trying to reduce spending. If inflation does come back stronger, it will more likely be due to fiscal spending. For example, programs to help people buy houses could raise demand and house prices."

Commercial real estate agent Gregg Glime, who markets property and gets involved in real estate development, said he welcomes the rate cut.

"I see the recent federal interest rate cuts as a positive development that has generated some optimism about the future of the market," Glime said by email. "However, we have yet to witness significant shifts in the commercial development landscape as a direct result to these cuts."

He said the rate cuts may prove beneficial in the long run, but developers still face significant challenges, including "elevated construction costs, persistently high land prices—since sellers have not adjusted their asking prices—and ongoing uncertainty in the leasing market."

Glime said he has seen several deals stall the past 18 months, but he remains optimistic.

"We are currently representing over $35 million in pending land and development deals across McLennan and Bell County. When compared to historical activity, this figure is actually pretty consistent with where we were a few years ago," he said. "Many of these deals have recently come together, which I believe to be reflective of the strong optimism in the economic prospects of Central Texas rather than being solely influenced by the recent rate reductions.

"Overall, I think we have held on strong as a market and I'm hopeful we are starting to see the light at the end of the tunnel."

Kris Collins, executive vice president for economic development at the Greater Waco Chamber of Commerce, said by email that the local economy remains robust, "though we have seen a few projects pause decision-making due to the increases in the (Fed) rate.

"The FED's decision to cut the rate is a positive step that will benefit consumers and businesses, but it may take some time before those benefits area realized. Additional reduction of the rate will be helpful, but the FED will likely be methodical in its approach to reductions to avoid overstimulating the economy."

Waco-based economist Ray Perryman said the rate cut "was widely anticipated and is having modestly positive effects."

"Mortgage rates, some credit card rates, the proline rate and others are also falling, which lowers costs of homes, major consumer purchases, commercial real estate, business investment, and other purchases," Perryman said. "The larger effects will surface over time, as more rate cuts are implemented."

Local real estate agent Joe Reed said his searches Wednesday revealed mortgage interest rates "in the 5's and 6's," whereas 7% or higher had become the norm as the Fed raised interest rates to combat inflation.

"Lower interest rates open up affordability in buying," Reed said. "The market is still not moving as quickly as what we had hoped, but it's getting there."