Fed Rate Drops .25%
April 30th, 2008 by Harvey ShapiroThe US Federal Reserve knocked a quarter-point, or 25 basis points, off the federal funds rate, taking the rate down to 2.0 percent. This latest decrease lowered this rate by a total of 3.25 percent since September. The 40-year low for this rate occurred in 2003 at 1.0 percent, then increased to near 5.0 pecent in 2006-7 before the recent declines.
The impact of this rate cut should have a positive effect on the housing market, albeit a small one. With the weakening economy, I’m not sure that a 25-basis point move was adequate to stem inflation, but it needed to be balanced against the negative effect of a weaker dollar.
Let’s hope this rate cut helps do the trick. Do you think the Fed made a wise move?
April 30th, 2008 at 9:58 am
It won’t affect the housing market in any way as most of the ARM loans are tied to LIBOR which is not affected by this rate cut. Additionally, fixed rate conforming loans are already pretty low, I don’t see it going any lower. Perhaps it affects the junior jumbo loans that are trading at about 125 basis points higher than traditional fixed rate conforming loans but this junior jumbo loan program is so flawed and badly managed, it’s not helping anybody. If anything it’s another example of the Bush Administration having no clue how to address the housing crisis and understanding that they just need to let it bleed.
April 30th, 2008 at 1:34 pm
I dont think the 30yr mortgages are tied very tightly to the fed rate cuts, so I dont see it making a difference. Also, I think the rate cut will actually increase inflation as it generally makes money cheaper, increasing the cost of commodities (as we have witnessed). I think the Fed really is between a rock and a hard place as the only tool they really have is to cut rates, but doing so increases inflation. I agree that they should not be trying to save the housing market, I think the market should be allowed to work itself out and the government should not be involved. If anything more financial education is needed for people, not big government bailouts. Personally I love real estate market declines and bases as that is where you make money- when you buy!
May 1st, 2008 at 8:30 am
Thanks for your comments, Juan, but let me set the record straight on ARM’s. In this week’s survey of mortgage lenders, with 39 reporting, half used LIBOR to set their rate and the other half used the US Treasury which reacts quickly to overnight Fed rate cuts. This latter group includes First Hawaiian Bank and Central Pacific HomeLoans.
May 2nd, 2008 at 10:29 pm
I’ve been watching what’s been recording and I see a swing from less east oahu, honolulu areas recording and more leeward, windward areas recording. My hunch is that median prices (what realtors like to use as a measuring stick for the market) will fall substantially in May and June year-to-year. 650k and 685k respectively a year ago will probablly be around 610k to 625k this year. Maybe less! Less sales and more inventory will put even more pressure on prices in the next two years. Unless incomes grow substantially (which is not going to happen), inflation stems, consumer confidence turns around, European and Asian investors make their long awaited arrival into our market (but with our economy as a whole bordering a recession I don’t think their coming in droves), layoffs stop poping up every time I turn on the news, single family homes sell quicker than 150-200 days while having multiple price drops along the way, inventory shrinks, demand grows, lenders bring back sub prime loans, “stated” income loans, FMac and FMae will still purchase loans from lenders who had their own appraisers deliberately over appraise properties to get the loan to value closer to fit people in mortgages they couldn’t afford?
Harvey, what do you think?
Also I have a question: if we have a $50k downpayment, FICO scores of 760, earn $75k a year as a household, have no debt except a car payment of $300 a month, and want to purchase a median prices home at $635k, would we be “approved” for a 30 year fixed at less than 6%.