Hello to all my valued colleagues
So much has happened in the last two weeks and yet in some ways not much has changed. Late on Monday evening two weeks ago, I sent this note to 400 Real Estate agents in my area.
"It looks like the perfect storm! Dow futures are down almost 500 points after Asian and European stocks plunged over night. Over night treasury yields have plunged in a flight to safety as the 10 year yield reaches 3.53%! What does this mean? If Ben Bernanke and company do not announce an emergency rate cut before the opening bell on Tuesday morning, mortgage rates could fall to historical lows!"
Well, Bernanke did step in and lowered the Federal Funds rate by 3/4 point before the opening bell. Investors seemed confused by the action as the Dow Jones Industrial average plunged 500 points in the 1st hour after the announcement. Money from stocks wound up in the safety of mortgage bonds moving mortgage rates to their lowest point in 5 years. Confused investors then decided that the cut was a good thing with a furious reversal by day's end with mortgage rates moving up 1/2 point by the closing bell.
On Wednesday, January 30th, the Feds eased again, this time by 1/2 point after announcing that the preliminary 4th quarter Gross Domestic Product moved up by a paltry .6%. Remember, the definition of recession is two consecutive quarters with negative GDP growth.
The big shock came Tuesday morning when the ISM Non-Manufacturing Index (a measure of the expansion or contraction of service related businesses) was released before the opening bell, coming in at 41.9 vs estimates of 53.0. (Above 50 is expansion...below 50 indicates contraction). Service companies represent 60% of our economy! There is a strong possibility that the Bernanke and company will once again cut before the scheduled March 18th meeting and it may be by as much as another 3/4 point. The Dow Jones Industrial Average plunged 370 points by the closing bell today.
So, how is it that after slashing the Federal Funds Rate by 1.25% in 8 days with another 3/4% cut ahead, are we in the same position we were that night 2 weeks ago?
The Dow is trading at the same level today as it was the day after the emergency cut. The 10 year treasury is trading at 3.54%. The Asian Nikkai exchange is down 640 points as of this moment. In my opinion, no matter how aggressive the Feds continue to be, they can not prevent recession.
But as investors lose confidence in stocks, mortgage rates should continue to fall and that will eventually bring buyers back into the Real Estate market. In fact, some are concerned that low interest rates could lead to the "bubble" in Real Estate that was a big part of what led us to this dark place we've been in. There is a big difference now that will keep history from repeating itself. Lending guidelines have tightened and those with questionable credit will no long be able to be in a position to put little or nothing down to buy a home. Buyers will from now on have good credit with money for a down payment and they will be required to document the income required.
As both short term and long term rates decline, it will lead to more disposable income for potential buyers. Homeowners that previously refinanced into historically low rates will now be able to invest in new real estate with amazing value with even lower rates. As investors lose confidence in stocks, they will eventually turn to Real Estate as they did when we suffered our last recession after 9/11. This recovery will be gradual but inevitable.
The stimulus package announced by President Bush and being negotiated by the House and Senate will include a temporary bump-up of the conforming loan limit from $417,000 to $625,000. (Over the last 8 months, Wall Street has had no buyers of mortgages not insured by Fannie Mae and Freddie Mac causing jumbo rates to be as much as 1.75% higher than conforming loans. That has no doubt had a significant effect on the sale of more expensive homes that require larger mortgages.) This could be announced and put into effect quickly.
The Feds will continue to be aggressive because they have to. And because they are FINALLY convinced that the way to a healthy economy involves a recovery of the Real Estate market, we can be reasonably sure we have seen the worst.
Until next time, I wish you good times and good business. Rick
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