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Federal Reserve's aggressive half-point cut
Tuesday could provide support for a slumping
housing market.
A quarter-point drop had already been priced into
the market for Treasury bills and other
instruments tied to mortgage rates, according to
Richard DeKaser, chief economist for National City
Corp. The deeper cut means mortgage rates may have
a little more room to fall, giving support to
prices.
The Fed Funds rate affects a range of consumer
loans, including home equity and mortgages. Lower
mortgage rates would add to the number of home
buyers able to afford to make purchases,
increasing demand for properties and buoying home
prices. 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.
Interest rates for conforming loans - those of no
more than $417,000 - are already reasonably low,
averaging 6.31 percent for a 30-year fixed rate
loan.
But an important class of loans that might benefit
from the big cut: the high-ticket home mortgages
known as non-conforming or jumbo loans. These
loans have no guaranteed secondary market because
they exceed the $417,000 cap and Freddie Mac and
Fannie Mae will not buy them.
With investors wary about any loan perceived as
carrying the least bit of risk, jumbo rates have
risen in recent months. They carry rates about a
full point higher than conforming loans. Jumbos
are especially important in high-priced housing
markets such as
New York
,
California
,
Washington
D.C.
and
Boston
.
Jumbo rates may come down if the cut makes
consumers more confident, according to Mark Zandi,
chief economist for Moody's Economy.com.
However, the real problem in the housing market is
not interest rates, according to Keith Gumbinger,
vice president for HSH Associates, a mortgage
industry publisher. It is that there is not enough
money available for making loans.
"The liquidity problem hasn't changed,"
Gumbinger said. "The primary issue is trust
between buyers and holders of debt."
Investors holding worthless or heavily discounted
paper are not eager to buy more.
As a result, Gumbinger said problems in the
housing market problems are too entrenched for a
Fed rate drop to have an immediate impact.
Trust can take time to rebuild. Something that
might speed the rebuilding process is
better-than-expected earnings from the major Wall
Street banks. Tuesday, Lehman Brothers' reported
higher-than-forecasted profit, which allayed fears
about the wallop that the mortgage crisis may
inflict on Wall Street. Goldman Sachs, Morgan
Stanley and Bear Stearns are due to report
earnings later this week.
Home prices in many parts of the country remain
out of reach for average Americans, leading to
slow sales and lengthening inventories of houses
on the market.
Also adding to listings is a flood of new
foreclosures hitting the market.
That inventory is weighing heavily on housing
markets, according to Zandi, and much of it will
have to sell through before prices start to rise
again.
Newsletter
information courtesy of CNNMoney.
The purpose of this
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or refinancing real estate.
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