Will a move by the FOMC in September help housing

[michael]

Yield Curve Link

I don’t think that the FOMC’s decision to ease rates will help housing. The above link will allow you to see the shape of the yield curve dating back to 1978. In a perhaps oversimplified analysis, if you move the date to 1988 and drag your mouse through to 1997, you will see a period where the Fed Funds Rate (I’m assuming the 3 month T-bill tracks the Fed Funds Rate closely, although as you just witnessed over the last couple of weeks, the flight to quality really brought down the t-bill yield without Fed action) drops significantly from April 1989 at about 7.5% to 2.5 November 1993. Housing in Southern California continued its downward spiral for several more years.

The long end of the yield curve remained relatively consistent but the shape of the yield curve does not indicate what credit spreads were like and so therefore I don’t know what mortgage rates did. Either way, i don’t think the long end of the yield curve matters much in SoCal. Regardless of where the 10year treasury trades, most people in southern california cannot afford a 30year fixed mortgage.

So basically, be prepared for the real estate cheerleaders to call the bottom if/when the FOMC decides to cut rates. I personally think that we are way beyond interest rate cuts to stimulate real estate. We have a lot of excess to work through for years to come. Thoughts?

[DaCounselor]

I don’t think Fed cuts will be a magic bullet by any stretch of the imagination. Rates are only one sliver of the big picture. However, if you take the position that increasing foreclosures are one factor in driving values down, than any action that impacts the number of foreclosures is going to be relevant. Working under the assumption that a huge % of current and impending foreclosures are due to loan re-casts, rate cuts that lower the re-cast loan index will obviously reduce the level of increased payments. The deeper and more frequent the cuts, the lower the re-cast payments, the less borrower distress, and fewer foreclosures.

Some cases will be essentially unsalvagable, others are not. In any event, a .25 easing is not likely to have sweeping impact. It’s going to have to go deeper, and it’s going to have to get there pretty soon. Even if it does, it’s only a sliver of the big picture.

[stansd]

A Rate cut won’t move T-Bill yields or mortgage-Treasury risk premiums much. In that sense, it won’t help. OTOH, if the fed were not to cut rates, you’d probably see yields (possibly-recession fears would offset) and risk premiums (for sure) rise. In that sense, the cut will help.

I expect the Fed, and quasi bailout moves announced this week to have small “beneficial” (if all you care about are housing prices)impacts.

A strong headwind is enough to slow down a FAST moving freight train a bit, but not enough to stop it.

Stan

[LA_Renter]

I agree with your assessment. Great tool thanks for the link. The interesting thing I noticed is that the last California housing boom occurred with much higher interest rates, like you I don’t know what the actual mortgage rates were back then but I imagine they were much higher than the 2001 to 2006 boom. The Fed funds rate dropping from 7.5% to 2.5% shows how much more room the FED had to maneuver verses today. There isn’t a whole lot the FED can do buffer this other than dropping the FED Funds rate back to 1%. If we see the FED do that then it will only be a response to a severe recession.

[HLS]

In 2003 Prime was 4% (FED rate was 1%)
30 YR Mortgage rates were 5% (15 YR was 4.75%) at the bottom, and not there for long.

Prime is now 8.25%, a move up of 4.25%, and 30 Mortgage rates are 6%. The 4+ point Prime move equates to a 1 point move in mortgage rates.

EVEN IF prime drops a quarter or half point, it is possible that 30 yr rates will stay the same or rise. It won’t surprise me if FED holds rates (or even raises!)

Profit margins at the major lenders that are left are razor thin. The losses that are buried and unknown need to be compensated for. The business model that many lenders had doesn’t work any more…SO with a cheaper cost of money, they may just get together and increase their margins.

There must be profits to offset normal operating expenses as well as compensate for the huge losses that haven’t been announced yet.

A small move in rates isn’t going to be a bailout.

A major correction of unlimited foreclosures with no intervention and returning to lending standards that require a minimum 10% down payment is what is needed.

Yes, it will be ugly for 5-10 years, and only the strong will survive, but the aftermath will be that civility will be restored.

Let the chips fall where they may and reward the responsible people. The Govt is not concerned about the little guy, they need to protect “the system” from collapsing…We were and still are real close to disaster.

Only a tiny % of homes are up for sale and there is panic. Imagine if 10% of homeowners wanted to sell. There is no market for that many homes. Equity in a home is a false sense of security, that disappears by the billions.

[bsrsharma]

That link has good graphics and explanation. But in the present situation, it may be good to remember the caveat "Past performance is not necessarily indicative of future results". The reason being, the situation is not lack of money as much as lack of trust. Lack of money can be fixed by tweaking FFR, but that won't infuse trust. How are you going to tell all those who lost their pension funds in Europe and Asia that US borrowers really want to pay back their debt? How will you prove to them that a piece of paper stamped AAA by Moody's or S&P has value?

I think the days of splurging on foreign capital are over. We can only lend to each other what we save. And that is not a lot.

[schizo2buyORnot]

Of course a FOMC rate cut will “help.” It won’t stop what is happening but it will alleviate it to some degree. What that degree is remains to be seen. But to say an interest rate cut won’t help is naive. Help but not a panacea. Perhaps the biggest effect would be psychological. The actual affect on interest rates may indeed be marginal. However, if all of the people stacking up on the sidelines of SFH purchases get the sense that the fed is going to begin a cycle of cutting they may in unison or large portion decide the time to buy has arrived. Not PIGS of course but those prone to believe the bottom is just around the corner and they must just wait a little while more. An interest rate cut may goad them to act and buy. There is no question that there are a growing number of people who eventually plan on buying a SFH in San Diego but are waiting for the right time. When they decide to buy in sigificant numbers, whatever the impetus, it will certainly affect housing to the upside. The biggest affect on housing may be psychological.

In search of a crystal ball . . . .

[michael]

I’m sure there are plenty of folks on the sidelines waiting to buy. I think there have always been plenty of folks on the sideline ready to buy. The question is how many of them are qualified buyers? With underwriting standards making a comeback, the “REAL” demand will be weak. PIGs for the most part are the responsible folk that have enough cash for a significant down payment, solid FICO scores and good income. PIGs and PIG types will benefit, however, as indicated in my original link, a rate cut will not help aleviate the pain of the downward spiral.

The point of posting the link to the interactive yield curve was to demonstrate (simplisticly) that a rate cut didn’t help the housing market during the last downturn of the 90’s.

[bsrsharma]

if all of the people stacking up on the sidelines of SFH purchases ….

I think those are much smarter in reading the tea leaves. Most who haven't bought yet, won't buy till there is lot more blood in the water!

[LA_Renter]

“There is no question that there are a growing number of people who eventually plan on buying a SFH in San Diego but are waiting for the right time.”

Yes that is true….but that number is not that great compared to the number of people that jumped into the market before they should have. One of the effects of the extreme lax lending is that it pulled future demand into the market. I used to work in an industry where the company that I worked for would put together huge year end deals to meet the revenue and profit targets it communicated to the street. It’s a horrible way of doing business. We would offer my distributors money off and 180 days dating if they took in our product in December. So the distributors would calculate how much floor space they had available and if they need some type of temporary storage, they would calculate their projected sales through the first 180 days of the year and order that amount. It was GREAT seeing that December number of shipments. The only problem is that by the end of the first quarter of the following year Mgmt would be on the phone…..Where are the orders?? Well we pulled the first half of the years demand into Dec so there’s hardly anything above and beyond that we can ship now……I hated working for that company. The same thing has happened in housing, yes there is demand accumulating on the sidelines but the easy credit of 2003 – 06 pulled in a whole lot of future demand.

[CostaMesa]

Imagine if 10% of homeowners wanted to sell.

I’d say that 30%+ of the houses within a half-mile of my current rental have for sale signs out front as of this morning. Within a single block, the rate jumps to over half.

I must need better deodorant or something. 😀

[hipmatt]

I think the rate cut is a good sign of things to come, by this I mean more inflation, and further devaluation of the USD. I see no fighting chance for the USD in the long run.

The rate cut is a quick fix, but harmful in the long run. It’s clear, that a country that is defined by our over consumption and negative savings rate, when the fed must lower rates after being at 1% for so long, just illustrates how weak we really are.

Gold was up 8 dollars today, and looks close to a new 52 week high. I expect that gold will do even better after the rate cut.

[Anonymous]

A steep yield curve, i.e. low short term rates, definitely helps the profitability of banks.

Indirectly that changes the willingness of banks to loan—but banks get paid first.

Banks have this magic right to borrow from the Fed or Fed funds at low rates, and lend out at high rates—and then multiply it magically thanks to fractional (and ever decreasing reserve) banking.

Suppose I got $100 in cash. And then I printed out on my laserjet $1000 in “IOUs to DrChaos”, gave them to my buddies (payable with interest & principal to me). Would the bar take those IOUs for my buds’ beer? Obviously not.

But if you are a bank in the Federal Reserve System, those IOUs read “This note is legal tender for all debts, public and private”.

It IS good to be the king.

[bsrsharma]

CostaMesa – What area is that? (We lived in CM in ’91 on Harbor)

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