FED CUTS KEY INTEREST RATE TO HISTORIC LOW! IMPACT ON HOUSING MARKET? NONE . . . YET!

FED CUTS KEY INTEREST RATE TO HISTORIC LOW! IMPACT ON HOUSING MARKET? NONE . . . YET!

FED ACTION MOVES KEY FED FUNDS RATE TARGET TO BETWEEN 0 AND 0.25% – POISED FOR MORE ACTION TO RE-START SLUGGISH ECONOMY!

Being an armchair economist myself – one armed with little or no knowledge of sophisticated economic strategy – I often watch moves by the Federal Reserve Board and the U.S. Treasury Department and simply shake my head or wring my hands. Just like being on an airplane in heavy turbulence I hope and pray the folks in charge know what they are doing to right the ship. What about you?

The Fed completed their December meeting this afternoon by reducing it’s benchmark target rate to a maximum of 0.25%. The target has never been this low! Never!

Further the Fed signaled they would use "every weapon in its arsenal" to pull the U.S. out of its now year-long recession. They indicated that "labor market conditions have deteriorated and the available data indicate that consumer spending business investment and industrial production have declined" since its last meeting in October . "Financial markets remain quite strained and credit conditions tight."

Fed tactics can include floating more money – in essence increasing the paper money supply with hopes that banks will make more consumer and business loans. It can buy more Mortgage Backed Securities a strategy already proposed last month with hopes of reducing interest rates for new home loans to an attractive 4.5% or lower.

The Federal Reserve Board is also looking at the possibility of purchasing U.S. Treasury Notes in order to bring down rates for long-term loans.

The action by the Fed also included reducing the inter-bank Discount Rate to 0.5%. It will have the effect of lowering the so-called Prime Rate or the rate charged by banks to its best customers (not set by the Fed directly) to 3.5% from its current 4.0% level. This will reduce interest rates on some types of adjustable-rate mortgages credit card interest rates home equity loans and other loan programs tied to this rate and provide some relief to consumers many of whom seem to be drowning in ever-accumulating high-rate debt.

In better times interest rate cuts stimulate business and consumer spending as well as home purchases because of the increased availability of mortgage funding. The Fed must be careful that overly-aggressive rate cuts do not spur inflation. Those concerns are nearly silent now as the Federal Reserve board does not consider inflation a threat presently and many potential home buyers can’t get mortgages because of more-stringent underwriting standards and tighter credit in general.

So what happens to the Real Estate Market as a result of the latest Fed move both here in Chicago and across the U.S.?

After over a year of government assistance beginning with the sub-prime collapse of 2007 and culminating with the $700 Billion Federal Bailout of financial institutions less than two months ago the housing market is still reeling! Year-over-year foreclosures are up dramatically and they are predicted to continue to skyrocket throughout 2009. Median home prices resale units sold and new housing starts are tumbling.

Even today banks who have received bail out funds from the U.S. Government are hesitant to lend fearing increasing unemployment will lead to high rates of loan default in the future. The Fed does intend to buy about $600 Billion of Fannie Mae and Freddie Mac government-backed mortgage debt to allow these government-sponsored and now controlled entities to lend out increasing amounts of money earmarked for new home loans.

However in many parts of the U.S. homes-for-sale inventories remain bloated and the likelihood that home prices will continue to fall have many prospective buyers sitting on their hands wallets in pockets for now still unwilling to buy their new home.

Will any specific action restart the U.S. Housing Market? We’ll have to wait and see!

See Jon Hilsenrath’s article in today’s Wall Street Journal for more in-depth discussion as well as the Associated Press article in today’s Chicago Tribune for a summary report.

DEAN MOSS & DEAN’S TEAM CHICAGO