Tuesday, January 22, 2008

Southern California Beach Cities: FED Cuts Rates....Will Loan Rates Drop?

If you were hoping to see a big drop in your home loan rate you can forget it... it's not going to happen...at least not for awhile. The surprise rate cut by the FED this morning of .75 basis points may not be enough to satisfy the boys on Wall Street or the Bond markets. Speculation is that Wall Street will want to see further cuts at the meeting next week. Meanwhile back at the ranch the administration is throwing out feelers about a larger economic stimulus plan. Personally I think the operative word should be smarter not necessarily larger.

The latest idea of an $800-$1600 rebate is similar to the one they tried in 2001 that was a complete flop. It seems to me that a better idea wouldbe to bring back a few of the old rules on Wall Street. There was a reason the markets used to have stronger regulations ... we are now seeing the consequences from the deregulation that was pushed by the administration. We all need to understand that business is not altruistic. Business has one concern and that is making money. Shawn Tully in an article for Fortune on CNN Money disagrees with the FED cut. I think I fall more in line with Mr. Tully's thinking. Then again The Bing Blog may be closer to my feelings.

The good news in an otherwise dim outlook is that oil prices dropped a bit with fears of a recession still being of major concern. It's hard to sell a comodity if there are no buyers. In the credit markets BofA isn't doing so well so who knows if the Countrywide buyout will be completed. Wachovia also seem to be in a bit of trouble. Wells Fargo and WAMU are also seeing losses in value. I'm not sure the cut by the FED will be enough to help out everyone caught in this segment of the market.

So what does all this mean to our local real estate market.... are jumbo rates going to drastically drop... probably not. Dan Green from The Mortgage Reports in his post on the Bloodhound Blog explains it well. The Funds rate and discount rates are used by the banks to borrow money within the financial community and technically do not affect home mortgage rates. Mortgage rates are tied to bond rates not the discount or funds rate. Ultimately the funds and discount rates will have an effect on home loan rates but only indirectly. I know it's confusing but that's how it works.

The main reason for a degree of relief at the FED lowering rates is the hope that the cuts will bring stability into that quagmire that is the financial markets. If the fears of the market can be calmed from full panic mode and if the housing crisis begins to show signs of slowing we may see investors stumble back into the markets. If they preceive the risk to be lower then we may see jumbo rates with lower costs. However all is not gloom as those with home equity loans tied to the prime will see an immediate drop in rates. The prime rate dropped from 7.25% to 6.5% . Some credit cards tied to the prime may also see a decline in rates.. at least that's the theory.

For those of us in the Beach Cities a lower FED rate may have a more profound impact as many of those who live in our communities work in fields that have close ties to the financial markets. If your job and the economy appear more secure your outlook on housing may be a tad more optimistic.

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