I guess everyone is breathing a sigh of relief with the Federal Reserve cutting the rates 1/2% today. Not only did the Fed cut the rate, they exceeded the anticipated cut of 1/4%. So what will that mean to us that work real estate? Will it have an immediate impact on our sales? Or was the rate cut meant more for those caught up in the refinance credit squeeze, and now allow many of them the opportunity to reaffirm their debt at a slightly lower rate? If so, will most of the sub-prime borrowers just be locked into properties without equity? It is interesting to think of the alternative scenarios. The biggest fear was that many of the 100% borrowers would just walk away and let the properties fall into foreclosure. They had nothing to lose at all! So if the property owners by their refinance just lock the owners into properties that really are inflated above market values? For the financial institutions that approached the brink of the abyss, and now can step back an perhaps get a second chance..will this just prolong the inevitable? After all, they purposely made loans to those that could not afford to repay, or refinance! Since they created a lot of the mess we are now in in real estate...would it be better for all had the Fed not dropped the rates?
The phones have not started ringing off the hook with the much anticipated rate drop, so unlike past drops, there was not a pent up demand waiting on the sidelines to pounce on great opportunities that are now reasonably priced and affordable. This was what happened each time int he past when mortgage interest rates descended a little at a time from highs of 18% to 12% and less. At each drop, the phones started ringing and sales would take off in spurts. There are a lot of questions that will be answered by the marketplace in the next few months. I guess we'll just have to wait and see. There was however one major difference between 1988 and the current market that is disturbing. The slowdown in 1988 was interest rate driven as opposed to a price driven retreat that slowed the markets this time. High mortgage rates dominated the 1980's but in the last decade interest rates have been at 40 year lows for quite a while. It was the price of real estate that took financing to the edge of the abyss.
updated 9.24.2007
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I agree with David -- we are going to have to see a few more cuts for the phone to ring - at least for loans to make sense anyway........
Now if you have a non contingent borrower..... well - that is your gold mine... and the drop helps them
One positive is that homeowners with adjustable rate loans scheduled to adjust in the next few months will have less of an increase - perhaps adding less pressure to the foreclosure rates. A likely intent of the Fed move.
Thanks Jim, as always, for your insight
David Spencer I have that feeling in my gut! My sixth sense says there is more here than is meeting the eye. If all the big people said 1/4% move, and the Federal Reserve says 1/2%... Why? The Federal Reserve is not Santa Claus! What were the ramifications if they did not? The biggest problem is foreclosures. If owners walk away...who does that effect? Banks? Financial institutions? The Government? According to an article I read the other day from England...they talked about the sub-prime issue in America where over 50 Billion Pounds ($100,578,190,926 dollars) was lent out in the United States to borrowers that could never repay. Makes you think there were other reasons....
Lewis Poretz Yes, I agree it will take a few more cuts for the buyers to come back in.
David Slavin I think it will help, but I think we are going to have to wait and see..how!
Neal I am inclined to wait and see what transpires from this move. Does it slow the foreclosure numbers? Sales? Refinancing?
Paula I will wait and see also!
Eric Bouler I agree there are many other issues at play that are not being talked about! Savings rate is a critical one. Last year more was borrowed last year than earned! The first time since 1929! "Who is going to buy the baby boomer home?" Stay tuned!!!
An Interesting Articles:
Stock Watchers Are Cautious After Fed Cut
Jeff Judge Jeff I really don't know this time. I feel it is a very strange move. Wall Street and the Financials begged for it, talked about it, bashed Bernake's integrity and ability...then after it is all over. It seems they are just back to business as usual??? Are they going back to their old ways? I think something needs to be learned from the mess we are in, and change course.
Lisa Hill I agree, wait and see what happens.
Eric Bouler I don't think it is getting off the subject. When the Fed cuts rates...there is so much more that is involved. We tend only to look at home sales, new home, mortgages and construction. What about manufacturing, transportation, employment, consumer spending, inflation, consumer confidence and so much more.
Kaushik Sirkar I agree! What about the upper end of the market? Will buyers still rush out and buy homes in the higher price ranges? Will there still be sufficient access to credit for jumbo borrowers? I'd love to haer so loan officers and mortgage people weigh in on this!
does the rate cut really effect adj rates? You guys know that thing called the margin - they are typically loaded so regardless of what the fed does, there is typically a hike in the first adjutment....
9am weds morning - bond is headed the wrong way ~~~~~~~ could be along day
Tracy Santrock Thanks! I agree. This is multi-faceted with many variables.
Lewis Poretz I just heard on the Bloomberg XM radio station that out of the 450,000 sub-prime loans entering the adjustment period (with an average increase of over $400 / month0 over half will have to go into foreclosure. They cannot refinance, they cannot cash out if there is equity, and in most cases with declining market values hey cannot sell. Over 27% are already behind in payments...which makes them ineligiblee for the new proposed Federal bailout plan..which requires payments be current.
Jim, we can't understand what effect this will have on the solution if we don't understand the problem. I recently posted an article on Greenspan which gives my take on the problem.
I for one think that this is a move in the right direction, and I think that we will get another half-point drop by year end.
I hope your phone starts ringing.
Bill Roberts
Lewis Poretz Yes, from agents friends of mine asking me if my phone is ringing! Not one call came in today from a client or potential client!
The .5 bp decrease in the Fed Funds rate only equaled about .375 decrease in the cost of getting a particular rate. If the rate was 6% paying a ysp of .5 the rate after the decrease would be 6% paying .125% ysp. What the Fed did really did not affect the mortgage market. We will need to see a couple of more decreases in the Fed Fund rate before the actual rates will be affected.
John Popp Mortgage Professional Thank you for explaining. I think all should keep in mind these are incredible rates anyway! Our first home was 9.75%, our second home was 15.5%,our home in Virginia was 12%, and most of my loans in Atlanta were around 7%
Jim,
I hope it effects the real estate markets here in san Diego. Going into the holidays is not going to be merry.
Mike Lewis
Pass on those San Diego area leads to me Jim and if I get anyone needing a home in GA I'll pass it on to you. Great resume by the way.
Mike Lewis
Jim Crawford
Make sure you thank Al Gore.
Mike Lewis
so we packed up our bags and moved to Az..... we are all going to work for Chuck -----
Encouraging report from the trenches of Arizona- the phone *is* ringing here.
Jim,
I think it will take another couple of years for the public's perception to turn around. It won't happen overnight. The press will tire of slamming the real estate industry and they'll move on to their next victim. We have another factor to deal with, an election year ahead of us.
Lewis Poretz I used to live in Maryland in Charles County! My neighbors are telling me it is very slow there.
Eric Kodner I agree about the elections. Today congress is trying to pass bills raising the limits for FHA! Bernake warned them! See Article Here
Jim,
We also have to remember that when rates were in the double digits, the cost of a home was a fraction of what they are today. For home values to stay the same we need the rates to drop because household income did not increase to keep up with home values.
Jim - I don't think that the dropping of this rate has the intended effect that most think it will. The rate that was dropped is not tied to 30 year fixed rates which is the program that the majority of our buyers have used to finance their homes. The long term bond is what controls the 30 year fixed rate mortgages.
The easing of this rate should loosen up credit, help with equity loans, and most importantly help the overall psychology of the market. It certainly helps the stock market which in the big scheme of things makes people fell easier about spending money. When their net worth on paper looks better it tends to make people less conservative with their money.
John Popp I disagree. In a lot of places in the country the home prices are still at the levels we saw back then. In the south, in the rust belt there has been flat appreciation. A lot of real estate in the Ubited States does not price itself the same as Manhattan, Boston California or waterfront in Florida. Homes in other areas can be still purchased for around 200K or less.
Bill Gassett Thanks I know a lot of impact will be psychological.
What ever they can do to get us all out of this mess is greatly appreciated! People are scared and if this helps them financially or psychologically, we are all for it. Hopefully it will put a little spark back in the market. That's all we need!
Jim,
The Fed cut is generally good news for the financial system overall. It does make borrowing money in the very large picture cheaper. But its effect on the mortgage interest rates is minimal because they really are shaped by a whole host of factors. Psychologically it should help.
Rick and Lynn Orze I agree fully! "What ever they can do to get us all out of this mess is greatly appreciated!" I would just love to know if it is abailout of the big boys or the little people! It will take a little time to see.
Esko Kiuru "Psychologically it should help." I am going to continue to watch the markets, and read a lot. From what I am reading now the real effects of this rate cut will not be felt for 60-90 days.
I read a few more articles today that deal with the issue of why a .5% rate cut The following article sheds some light on the reasoning of the Federal Reserves moves.
Bernanke Assures Hill on Mortgage Hit
Bernake comments were sobering..."Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans," the Fed chairman said. The situation, he acknowledged, "has created significant market stress."
I believe that cutting the rate will only save the banks.....and hurt small businesses. I think it's amazing that our tax dollars are used to correct banks mistakes.... It you were in trouble with your bills you just can't go to the Government and they will bail you out..... What a tangle WEB we weave... but I know someone will feel this repercussion. Realtor hold on for the RIDE.....
Thanks for the POST
I found another great article this evening that explains a lot about the sub-prime mess, and explains the events of the recent Fed rate cut:
How We Got Into The SubPrime Lending Mess
Fed's Rate Cut Won't Help Consumers Who Need it the Most