I just spent an exciting few hours waiting for the Fed rate cut announcement, and then watching the euphoria take hold of Wall Street. I must admit I took advantage of it, day trading Toll Brothers (TOL) and the QQQQ for some quick profits. So I share in the enthusiasm. Thanks Ben!
But wait, not so fast! While the Fed's cuts to both the Fed Funds and the Discount rate by 1/2% brought an early Christmas to Wall Street, did it do the same for the Main Street Real Estate market?
My answer is a very tepid, "maybe". While lower interest rates do help home owners to save money on their loans, and helps to qualify them by what is called the "debt to income ratio" (DTI), the real problem which we now face has very little to do with interest rates. Besides, bonds and mortgage markets lead the Fed decisions on interest rates, not the other way around. Therefore, it is no sure thing that rates will decline further, unless the economy continues to erode.
The larger problem of the Real Estate market is two fold: Poor credit borrowers who no longer qualify for no money down conventional mortgages, and a boom in the number of foreclosures that is rapidly spreading across the country.
A tightening of mortgage standards creates a much smaller base of potential buyers in the market, while an increase in foreclosures will add to the current glut of unsold homes in inventory, and reduce home values in some areas.
But help may be on the way. Congress approved a plan today to allow FHA to back refinanced loans for borrowers who are delinquent on higher re-setting payments from ARM's. The problem, as one mortgage loan officer told me today, is that "the lenders don't want to touch these loans. They are still too risky."
Thus, we have the life line in place to help these drowning home owners, but no motivation by the "lifeguards" to jump into the pool!
However, the good news is that the FED's decision today may help loosen the reigns on the Jumbo Mortgage market. The Jumbo loans ($417,000 and higher) were all but eliminated last month by many lenders in a panicky move that was clearly just "throwing the baby out with the bath water".
In essence, they lumped the Jumbo loans together with the riskier sub prime and no documentation loans, and said let's simply drop them all. A loosening of the jumbo loan market now is crucial, because if the higher priced homes do not sell, then prices will decline and that creates a ripple effect whereupon the lower priced homes will also decrease in value.
The pity of it is that owner occupant jumbo loans are not really high risk loans, and should not be lumped together with other risky loans like sub-prime. A tightening of standards for the investor and so called "second home" jumbo loans would be more justifiable, but we should not punish people who want to buy $500,000 homes for their own use.
Ultimately, lower interest rates and lower prices could spur new buying, perhaps even a re-emergence of investors, but the credit issues are still the thorn in the rose, and may continue to be so for a long time.
The Fed's move today should help a little, but the problems of the post bubble Real Estate market are huge and too complex to be solved by a small cut in the interest rates. Rome wasn't built (nor torn down) in a day, and it won't be re-built in a couple of hours either!
The Tycoon Report