You are correct long term rates are not based on prime they are based on the 10 year t-bond. Most helocs are prime based. Remember that the FED doesn’t set prime, they set the Funds rate which banks use to as a marker for prime. So everytime the funds rate moves, the banks move the prime rate.
Yes, lower rates will help those in trouble, however, those without equity will still be in trouble. And a huge amount of buyers in 2004 and 2005 put 0% down. I think I read 40% of 1st time buyers put nothing down in 2005. And I can guarantee that most have no savings or back up plans.
If the FED lowers rates, meaning the Fedreal Funds rate, the 10 year may or may not decline. If the bond market thinks that the FED is letting inflation get out of control, the 10 year rate will rise. In fact, the FED is between a rock and a hard place. Inflation has been rising and the economy is slowing. So do they raise rates to curb inflation or drop rates to keep the economy and housing afloat? I think the FED is weak and will cater to the economy and housing. The problem is that this will let inflation continue. And ultimately they will have to raise rates at some point. That’s why Bill Gross of PIMCO, the largest bond manager, just wrote an article saying that this will be the last bond bull market. He means that the FED will panic and cut rates which boosts bond prices. But they won’t be able to cut them any lower. Last cycle the FED cut the funds rate to 1%. They don’t have any room to go lower. Then the FED is stuck like the Japanese FED. The Japanese FED cut rates to 0% and did what is called quantitative easing. Meaning they just printed money and bought 10 year bonds to drive those rates lower. It still didn’t help. The Japanese Real estate market has been down more than 50% for more than 10 years and stocks down more than 70%. It’s called a liquidity trap. If you lower rates too low, you can’t raise them again because people can’t repay the debt.
