Set aside the Fisher Formula and what have you and consider this. While the markets and the economy may be on the brink to head into recession, the silver lining, and it's a big one for it directly affects the forces causing today's havoc and headaches is that interest rates, short and long term, will go down. Lower interest rates mean increased demand for housing, which might not necessarily "save" the housing market, but certainly could make this spring at least "better" than it has been. Not to mention if rates decrease enough, a smaller "refinance boom" might occur as people take whatever steps they can to tighten their finances.
Regardless, sorry for the lack of posts, but it's that greatest time of the year;
Tax Season.
O Captain, my Captain.
ReplyDeleteYou wrote: "Lower interest rates mean increased demand for housing..."
And maybe they do, assuming that enough people qualify for loans that don't already have loans. But who today needs a house who does not already have one?
As you are clever enough to realize, most houses sold or most mortgages taken out result in one closed out. Because I already own a house with a mortgage, if I move to a new house I close out my old mortgage. Ergo the only real additions to the housing market come from a) those are currently renting (or are living with Mom and Dad) who buy houses or b) those who are buying second houses.
It ought to go without saying (but I'll say it anyway) that those folks are not the best credit risks, which is why subprime was necessary; to "help" the overall market lower interest rates must be accompanied by a lowering of credit standards in order to inflate the total number of qualified buyers and therefore the overall market.
But because of the fallout from subprime and Alt-A, lending standards are tightening. The potential housing market - the number of people who can actually borrow - is, in fact, shrinking, and in that case it doesn't really matter if rates go down, because all that means is that the best credit risks will get lower rates. They may lock in 5% rates rather than 6% rates, but that does not help the market overall, all it does is lower the lenders' cash flow on a static (best case) or shrinking (probable case) market.
It's almost unbelievable how fear dominates the global markets now. Bernanke is not doing any good with lowering the funds rate by a whopping 75 basis points. And there aren't any specifically bad news about the real economy yet, e.g., negative quaterly GDP growth.
ReplyDeleteI wonder what the Fed will do when some real recession figures come and they already have fired off their whole arsenal of monetary weapons.
It seems like nobody in the Fed or in the White House has learned anything about "expectations" of market participants. I agree with you that rates should be lowered, but it's very important to do it, as you'd probably say, in a Cary Grant way. This means being firm but moderate, cool and unimpressed by the begging, funds-rate-lowering-addicted stock market people, who need another "shot in the arm"...
I'm working my way into a place right now, saw my rate drop from 6.1% to 5.75% overnight. Locked it. Oh yeah.
ReplyDeleteI take offense to the person who said that those who are renting are probably not the best credit risk. I am renting after going through a divorce and have an 800+ FICO score. I teach and live in CA where the houses are expensive and the teachers don't make enough. So don't assume that people that rent are bad credit risks.
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