Hi, Real Estate Partners
Well...the name of the game is volatility! Very early Tuesday morning (well before the Wall Street bell), I told you that unless Ben Bernanke and the Federal Reserve would cut the discount and federal funds rates BEFORE the opening bell, there would be a flight to safety as funds moved out of stocks into bonds. This would have caused mortgage rates to plunge to levels NEVER seen before. While this would have been a good thing for prospective buyers, the resulting carnage on stock exchanges would most likely have been the last straw in our battle to avoid a very serious recession. CNBC analyst Jim Cramer stated that the Dow would have fallen between 1000 and 2000 points by the 30th had the Feds not stepped in.
Well...as you know, the Fed DID act by slashing Discount and Federal Funds rates by ¾ point in what was the largest emergency cut ever. Furthermore, there is an additional ½ point built into the market for a cut on the scheduled meeting date of January 30th. That would be a cut of 1.25 points in just 1 week! It's clear that Bernanke is more worried about the economy than he is saying as he virtually abandons voicing his concerns about inflation and focuses on stimulating growth.
What does a Federal Funds Rate of 3% and a Discount Rate of 3.5% mean to this economy? The Discount Rate is the rate that the Feds lend to other banks. As this rate drops, banks have more incentive to lend as their cost of money is lower and they make more! This speaks to liquidity as the secondary mortgage market has gotten tighter and more expensive over the past few months. The Federal Funds Rate is the rate that banks charge each other and is the index that the Prime Rate follows. The Prime Rate is the index that commercial debt, credit card debt, and home equity lines adjusts to. Once again, the cost of living for virtually everyone has just gone down.
Yesterday, I received 20 calls from clients that were locked in for purchase and refinance closing over the next 30 days. In each case, the question was "Now that the Feds lowered rates by 3/4 , can I get a better mortgage rate?" My answer to them was accented by market events of yesterday. The Feds are cutting the short term rates, which have the effect I just described. Mortgage rates go down when investors choose the safety of mortgage bonds over stocks. Yesterday's 600 point Dow Jones Industrial Average swing resulted in funds flowing AWAY from mortgage bonds into stocks. The result was that mortgage rates went up 3/8% in the afternoon alone. At this writing, mortgage bonds are trading lower again. The result of the Fed cut (at least for now) was to raise mortgage rates.
Jumbo Loan limits currently at $417,000 could be temporarily increased to $625,000, my sources tell me. This is great news for the higher priced home market as the Jumbo 30 year Fixed rate has been up to 1.75% higher than the conforming limit and would be eligible for the same low rates as conforming. I will let you know when I hear more.
The long term outlook for mortgage rates is still lower but the volatility that we are experiencing will continue. The saying is that Real Estate is often the first into a recession and the first out. With lower mortgage rates ahead, the Feds more aggressive than EVER before, and Congress actively plotting to shock this economy out of recession with stimulus packages, I look for Real Estate to begin it's recovery this year. I could be wrong, but the things I have written to you all about over the last months have and are happening.
Get ready for a wild ride this year! Rick
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