LIL’ BUDDY’S BLOG – THE FED RATE CUT – WILL IT HELP?
LIL’ BUDDY’S BLOG – THE FED RATE CUT – WILL IT HELP?
THE CHICAGO REAL ESTATE MARKET AND OTHER THINGS CHICAGO FROM THE POINT OF VIEW OF A LITTLE WHITE DOG!
A dog needs to keep up these days you know so I spend about two hours each morning scanning important articles relating to real estate and more specifically the real estate market here in Chicago IL.
On Tuesday September 18th the Federal Reserve Board made big news by reducing the Fed Funds Rate or the bank-to-bank lending rate by 0.5% to 4.75%. This is the first time the Fed reduced this key rate in over four years. It comes on the heels of the Fed reducing the Discount Rate or overnight bank lending rate by 1/2 percent at its last meeting on August 7th.
What does this all mean to you – the average dog on the street?
According to my friend and colleague on two paws noted Chicago Tribune Real Estate Columnist Mary Umberger the rate cut may not be enough to turn around the weakened housing market here in Chicago. At least not yet! "After all" Mary explains "real estate didn’t go into a spin because interest rates rose but because jitters in the bond market caused funds for lending to evaporate."
In the short term according to Rich Bira Branch Manager for First Capital Mortage here in Chicago and a Dean’s Team Preferred Professional Mortgage Partner some borrowers will see quick benefit. "People with an adjustable-rate line of credit on thier homes – or anything tied to the prime rates – will almost instantaly see their rates drop by one-half percent. Those paying 8.75 percent last Tuesday on an Equity Line of Credit will come down next month to 8.25 percent" said Bira. "That’s instant relief!"
Donna Burge President of Baird & Warner Financial Services in Chicago predicts other mortgage indices may go down as a result of the cut in the Fed rates but that the more important consumer effect will be lower costs on credit cards. "That will spur consumer spending" she added.
According to Umberger however the Fed’s action most likely won’t create immediate relief for those with most types of residential mortgages. Those with most adjustable mortgages won’t see any relief right away as many of these loans are tied to the London Interbank Offered Rate or LIBOR. This rate recently jumped sharply above the Federal Funds rate due to market uncertainty and the onqoing credit unease. "If LIBOR doesn’t come down there will be no relief" says James Bianco president of Bianco Research LLC a market research firm here in Chicago.
Bob Walters Chief Economist for Quicken Mortgage in Livonia Michigan expects slightly more attractive rates for adjustable rate mortage holders. "But if investors are inspired to the rate cut to invest their money in stocks rather than bonds" he continues "bond prices could go down thus driving up long-term mortgage rates."
"If inflation concerns continue the 0.5 percent rate cut could actually have a negative effect on mortgage rates long term."
In summary Mary suggests the Fed Funds drop could trickle down into a positive effect on the residential mortgage market. However and according to David Hanna president-elect of The Chicago Association of Realtors "it will take flexibility in loan programs to make a real difference in the Chicago real estate market."
What should you dogs take away from this? The Fed’s moves on interest rates are steps in the right direction but not an overnight fix. It might take a while for the real estate market here in Chicago and Chicagoland to strengthen once again.
What’s your take on this? Wrap it in a small plastic bag and send it by.
YOUR ACE REPORTER ON FOUR PAWS
BUDDY HOLLY MOSS
