Why the FED Rate Cut May Hurt Mortgage Rates
Categories: As Heard on the Street, Front Page, Mortgage News, Real Estate News
hiThe FED has, in error in my opinion, lowered the FED FUNDS and DISCOUNT rate by 50 basis points. It is my HUMBLE opinion this will cause long term mortgage rates to rise despite the almost drunken euphoria being celebrated in the stock market. Why?
The simple answer is that by lowering SHORT TERM interest rates, long term rates (Think 30 year fixed rate mortgage) should rise as inflationary fears will be stoked with so much more money being pumped in the system (more money chasing goods and services). The argument is that inflation is under control and that the markets need rescuing today.
But is it under control? Oil is over $80 per barrel, gold is over $700 an ounce, wheat and other grains are at highs, and zinc and other necessary commodities are also at all time highs. Further, unit labor costs are moving higher indicating each of anything made costs more to produce than before. Unit labor costs were Alan Greenspan’s wild card as while he lowered rates, unit labor costs were dropping due to rapid technological advances, indicating a disinflationary environment.
It perplexes me to understand why the FED would cave in to a bunch of whiners on Wall Street when the stock market was 5% from its all time high, rates were already low, and by most metrics the economy is humming along just fine (although it may not feel that way if you are involved in South Florida residential real estate).
This move will cause the dollar to lose value, as well. Now, who can tell me that Chinese investors, who are the biggest buyers of US Treasury Notes and Bonds, will buy more US debt at lower rates and suffer the consequences of a loss on the investment when the dollars need to be converted back into Yuan? Bond Investors desire their principal to be worth as much as possible in real terms at redemption and with inflation there is a real loss on their investment. And, if the dollar drops in value just think how much more it will cost to buy imports (think toys with lead paint) if the dollar is losing value against foreign currencies? And how about the cost of that trip to The Alps this winter?
What we have is a credit crunch. Lenders have money available but are now asking to be rewarded for the risk of a particular loan. I suppose the FED will solve some of this but the rewards will go to those who got us in the position we are in today. Do you believe that if investors did not wish to purchase subprime and jumbo loans yesterday at higher rates, they will now want to buy these financial instruments at lower rates? Perhaps this will help lessen the basis between conforming loans (<$417,000) and Jumbos, bringing the spread to more historical levels. This would be an assist to markets such as ours who have a heavy concentration of high value real estate. However, in the long run more money in the system is almost always a precursor to inflation.
I fail to see how this solves anything housing related which was the initial perceived cause of this wreck, but then again I am not Ben Stein.
Good point Scott. Many Sellers are of the opinion that the mortgage rates are going to go down and therefore refuse to reduce the price of their homes. I will share your “humble opinion” with them.
yeaaaa! you blogged!! Great blog. I find my self quoting you when asked about the Fed cut. I hope you don’t mind. You explained all this very well and in layman’s terms..
Thanks Boss!
Great blog Scott…welcome to the blogging world!
Great blog Scott,
It seems like a money game by the powerful. I didn’t realize all the remificatins of this move. Thanks for the information.
You are not Ben Stein, you are much better looking. When you get called to appear on “Money Line” (or any other show like that I’m too stupid and poor to watch) spread the word so we can Tivo you. Impressive blog and you expressed your argument well. I wouldn’t say it was layman’s terms . . . but to my conspiracy-minded thinking it could be a sneaky way to get long-term mortgage rates back up(?). Is the bottom line here no poor people are helped (mooks like me who rent ’cause they can’t afford to buy)? So Investors will benefit? Greeaaaat. Wait a minute, I work in real estate. (sigh) What’s the point of owning a house anyway, with property taxes it’s never really paid for, you’re just renting it from the government; like you rent your clothes from the dry cleaner. (just grousing from the ranks)
Impressive. Didn’t know you could write so well.!