Fed Drops Rates to .25% - Three Signs Augur a Renewed Housing Market
During the week of November 24, mortgage rates dropped sharply as the government announced its $600 billion planned purchases of distressed Fannie/Freddie loans. Mortgage applications jumped but now are subsiding into December; one reason is consumers are watching to see whether rates go lower. Now that the Fed has dropped its discount rate to .25% today, it's certain mortgage rates will continue to drop.
Consumers are now preparing to pull the trigger on housing as soon as they see the bottom. This January, three positive signs will converge to augur renewed real estate activity:
- Obama has pledged to stabilize the housing markets with an aggressive stimulus plan, and according to CNBC today, continued massive buyout of bad mortgages. It's all part of his "Big Bang" inaugural plan.
- The Fed, by essentially dropping interest rates to 0% will continue to loosen credit by pushing mortgage interest rates towards 4.50%, a target 30-year fixed rate that has gelled in the consumer minds. Once that rate hits 4.50%, consumers will likely consider that rate the bottom (they will likely not see again in their lifetime) and will jump off the fence.
- Housing starts continue to drop to record lows, easing inventory pressure.
This is ill advised, and will not have apositive effect on the housing market. The current problem stems from over lending and lack of savings. All this will do is hit savers in the pocketbook. When the option ARMs start to fold, the housing market will drop even further. I can hardly believe that you think this will be the stimulus needed.
No one is going to jump off the fence and buy an overpriced piece of property just because they are now promised cheap money - again.
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Hi Pat I am surprised that you say "Now that the Fed has dropped its discount rate to .25% today, it's certain mortgage rates will continue to drop."
The fact that the fed lowered the discount rate does not mean that 30 year fixed rates which is the loan vehicle of choice when buying a home will drop! In fact most of the time the exact opposite occurs. I left the link for you to read why.
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You're correct Bill... I was writing too quickly to get a post on the Fed rate drop before leaving for lunch... I did mean that all signs (the three points mentioned in the article) point to mortgage rates dropping, in fact, they did so today after the Fed announcement.
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It was good that they did Pat. Lets hope the rates have a positive effect on the Real Estate market as we head into 09.
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Pat -
I liked what you said, but I just don't know if I believe it! I think that real estate activity should increase, but the decline in prices will probably continue until we reach rental parity (or even go beyond it.)
Actually, we will probably dip below "bottom" before a true recovery becomes evident!
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The spread between the Fed rate and mortgage rates in the US is SHOCKING! Hopefully this will being to narrow.
This is the right course of action by the Fed. Credit needs to be cheap and readily available.
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Hi Pat,
Is there a better way to look up people on my Directory on Twitter, so I can target(address) my tweet to them.
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I agree with Downtown Vancover. Lowered rates will definitely help the marketplace.
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