What effect will the Fed's .5% rate cut have on housing and mortgage markets?
9/18/07 -- The Fed responded to recent problems in the housing and money markets by cutting its Funds rate by a half point, from 5.25 percent to 4.75 percent.
Before the Fed's meeting, there had been much debate over the size of the likely reduction. Arguments were leveled for both quarter point and half point cuts. Many worried a quarter point would be ineffective, while others cautioned about the message a cut, especially a large one, would send to real estate investors and speculators who got burned by the housing downturn. Ben Bernanke, the Fed chairman, showed that the problems in the housing and credit markets warranted an aggressive cut in an effort to defend against a potential recession. The entire board agreed. The committee's statement makes this point: "Today's action is intended to forestall some of the adverse effects on the broader economy that might otherwise arise from disruptions in financial markets."
The move was an effort to restore confidence, and the stock market responded by jumping across the board. "The Dow Jones industrial average jumped 200 points almost instantly and ended the day up 335 points, or 2.51 percent, at 13,739.39," reports the New York Times. Every other major index enjoyed similar responses.
The cut could mean good things for consumers in many areas. Loans for everything from cars to houses could be affected. While the rate cut would not change the actual price of the items, it would make month to month payments smaller. "Buyers generally care less about the actual purchase price than they do about the size of their payments. If rates drop, so will monthly debt obligations" (CNN Money). In turn, this should encourage people to take out mortgages or refinance, helping to alleviate soaring foreclosure rates and inventory surpluses.
Jumbo loans are in a position to especially benefit from the rate cut. These exceed the $417,000 allowed by Fannie Mae and Freddie Mac, meaning they "have no guaranteed secondary market". Because of this, jumbo loan rates have jumped since the problems in the credit markets began. These loans are especially important in some of the areas hit hardest by the housing downturn, such as Washington D.C. and California.
Unfortunately, part of the problem cannot be cured by a rate cut. "The main problem in the last month has not been high rates so much as the availability of capital to complete deals," according to the Times. The Fed has tried to "ease the liquidity crises by encouraging banks to borrow money through its discount window, an outlet originally created as an emergency source of overnight funding for banks in a cash squeeze," by slashing the discount rate.
Overall, it will hopefully encourage more consumers to make big ticket purchases in what has become predominantly a buyers market. Huge discounts and unprecedented incentives from homebuilders and American automakers, combined with lowered interest rates (and hopefully the liquidity for them to be realized), make now a great time to buy. Consumers should also see lower rates on debt such as credit cards in time for the holiday shopping season.
Comment on this article by visiting ConstructionJobsBlog.com!
RECOMMEND THIS ARTICLE
You must be logged in
to recommend articles
| 
