The Right Place

Will the Federal Reserve’s cut in the federal funds rate to 3.5 percent help the stalled real estate market?

“Yes, this will help,” said Michelle Collins, senior vice president and director of mortgage lending with ShoreBank.

Mortgage rates tend to move in tandem with the federal funds rate. With interest rates so low, borrowers with secure jobs and good credit will find it very affordable to borrow. And to some degree, “It will make borrowing more affordable for all borrowers,” Collins said. “On the other hand, it is not a magic pill that will turn this whole thing around.”

The underlying problem is that the market uncertainty is caused by the subprime debacle and the increased number of foreclosures, Collins says, and this cut in the interest rates will not have any impact on the foreclosures. “It might have a positive impact on borrowers who are in adjustable loans that have not yet reset depending on the index their adjusting rate is tied to,” she says.

It’s too late if your adjustable has already gone up, she said. Obviously, the drop in interest rates for new home borrowers or borrowers who are refinancing, is a positive because banks can now offer a lower interest rate. “In past years, [an action by the Fed] like this would have spurred the real estate market like you cannot believe,” she said. “The real problem in the marketplace is that it is silent.”

Some economists and banking professionals are questioning whether a stimulus package is really what’s needed, and Collins agreed.

“Our economy is in trouble and we don’t have a solution,” she said. “It’s going to take some really creative thinking, out of the box, on a large scale, to find a solution.”

Economists in Chicago say the Fed’s actions are just part of the solution.

“I think what the Fed is doing is laudable,” said Michael Miller, professor of economics in DePaul University’s College of Commerce. The U.S. economy has two problems, he said. “We need to recreate confidence in the financial markets that these instruments can be priced; that we know what they are worth,” Miller said.

The other problem is the supply and demand issue. “One of the problems is the vast supply of unsold homes,” Miller said. “We can deal with that by lowering the interest rate.” It is just a matter of creating demand where you don’t have to create unreasonable mortgages, he said.

“I wish Bernanke had lowered rates [last week],” he said. “But everyone expected him to move 50 basis points. “Surprises are a more effective approach,” Miller said.

“[Lowering rates] between meetings is generally a big surprise.” David Oser, chief economist for ShoreBank, agreed. “This move was an absolute total stunner of a surprise,” Oser said. “Nobody expected anything like this.

“The Fed is not going to stop here,” Oser said. “Now we are at 3.5 percent and falling. It is a very fast moving situation.”

But he said he would be surprised if the Federal Reserve took the rate as low as 1 percent, which some economists are calling for.

“On June 25, 2003, the fed funds rate dropped its target to 1 percent, but it had not been that low since the 1950s,” Oser said. But, Oser said, you can’t compare these two periods. “We do not have deflation and that was what the Fed was worried about in 2003.”

This is a case of the Fed asserting its leadership in a financial crisis that its actions had trailed all of 2007.

“We’re not behind the curve anymore,” Oser said. “We’re there.”

The housing markets are not functioning very well right now, Oser said, due to the oversupply of housing and the vast numbers of people who bought earlier this decade.

“We are way overbuilt,” Oser said.

As a solution, he’d like to see a more thoughtful approach to immigration, one that could hold some answers for the housing market.

“The crackdown on immigration is hurting us,” Oser said. “These are people who would quickly become homeowners. “It’s my own personal hot button,” Oser said. “I think the strength of our nation is that people want to come here. People who are ambitious. Talented people who want to participate in an efficient economy where their talents will not be held back.”

Our current approach is “Throwing out a lot of babies and not a lot of bathwater,” he said. “I find it very counterproductive.”

Technorati: