Hello to all my Real Estate partners
What a week it has been! On Wall Street, every day has resulted in a triple digit change with 4 of the 5 days ending in changes over 400 points!
Monday we saw one of the worst slides in history as the DOW finished down 504 points. On Tuesday, the Feds met to decide short term interest rate direction. The futures market called for a 100% chance of a ¼ point cut in the Federal Funds rate. While the decision to hold rates were they were was unexpected, so was investor reaction. When at the end of the day a rumor spread that the government might step in to save embattled AIG, the market actually ignored the Fed inaction with the DOW finishing up 141 points.
Unfortunately, the disaster was delayed just one day as the DOW finished back down over 450 point! (The same investors that were encouraged by the potential Federal solution to the world's biggest insurers collapse reacted very negatively to the details of the plan. In exchange for a 80% share of AIG going to Uncle Sam, they received a loan of $85 billion at over 11% interest. The truth is, no matter what this moves cost tax payers, the US could do very well should the company rebound with 80% of profits headed to the US treasury.)
On Thursday, unbelievably, the DOW, which had been down well over 120 points earlier, had a record rally in the last couple of hours which resulted in a 410 point GAIN. The rumor spread like wildfire that the government had a plan to step in to take over and manage all of the bad mortgage debt from banks! This morning we got the details as the following things were announced:
1) The Fed will buy bad assets (mortgages that are not performing and other mortgage securities that are keeping lenders from lending)
This will open up the arteries of lenders that have declined to lend because their books are clogged up with bad mortgages.
2) The US Treasury will purchase $10 BILLION of Mortgage Backed Securities! (Doubling what they had committed to.)
The purchase of Mortgage Backed Securities brings long term fixed rates down!
3) Fannie Mae and Freddie Mac will buy MBS!
4) Insurance fund for Money Market Funds
This will keep investors from panicking and having a run on their money markets as many moved down to record low reserve levels.
5) Short selling on Wall Street BANNED for the next two weeks
For the next two weeks, investors will not be able to manipulate stock prices by shorting them. This will bring some stability to Wall Street. The government may extend if they feel it to be neccesary.
6) More steps to be announced!
Folks...the Feds are in an all assault mode! This is VERY good for Real Estate! They are for the first time truly on our side. It has taken them the better part of two years to realize and admit that this economy can NOT recover with out the recovery of the Real Estate sector...something that all of us knew a long time ago. Today, Treasury Secretary Hank Paulson told the nation that Real Estate needs to be fixed for our economy to fully recover
Mortgage rates go down as investors invest in Mortgage Backed Securities. Until the Feds took control of Fannie Mae and Freddie Mac, it was considered to be an unsafe investment to buy Mortgage Backed Securities...this is no longer the case. Rates already lower than they've been for quite some time should now continue to drop. This will happened as soon as this record volatility calms a bit. That is the government's intent...to calm the fears and to create a market that will encourage once again banks to lend at lower costs.
Hang in there...these almost daily government moves are designed to turn things around quickly because there is no more time to waste. We have survived the most challenging years of our business and survive so that we will thrive as the cycle turns in our favor.
Until next time, I wish you good times and good business. Rick
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