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Fed cut could buoy housing markets

Half-way home: the big drop in Fed fund rate may offer a little help to a besieged housing market.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The Federal Reserve's aggressive half-point cut Tuesday could provide support for a slumping housing market.

A quarter-point drop had already been priced into the market for Treasury bills and other instruments tied to mortgage rates, according to Richard DeKaser, chief economist for National City Corp. The deeper cut means mortgage rates may have a little more room to fall, giving support to prices.

Mortgage Rates
30 yr fixed 4.07%
15 yr fixed 3.18%
5/1 ARM 3.36%
30 yr refi 4.05%
15 yr refi 3.17%

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Rates provided by Bankrate.com.

The Fed Funds rate affects a range of consumer loans, including home equity and mortgages. Lower mortgage rates would add to the number of home buyers able to afford to make purchases, increasing demand for properties and buoying home prices. Buyers generally care less about the actual purchase price than they do about the size of their payments. If rates drop, so will monthly debt obligations. (Latest home prices)

Interest rates for conforming loans - those of no more than $417,000 - are already reasonably low, averaging 6.31 percent for a 30-year fixed rate loan.

But an important class of loans that might benefit from the big cut: the high-ticket home mortgages known as non-conforming or jumbo loans. These loans have no guaranteed secondary market because they exceed the $417,000 cap and Freddie Mac and Fannie Mae will not buy them.

With investors wary about any loan perceived as carrying the least bit of risk, jumbo rates have risen in recent months. They carry rates about a full point higher than conforming loans. Jumbos are especially important in high-priced housing markets such as New York, California, Washington D.C. and Boston.

Jumbo rates may come down if the cut makes consumers more confident, according to Mark Zandi, chief economist for Moody's Economy.com.

However, the real problem in the housing market is not interest rates, according to Keith Gumbinger, vice president for HSH Associates, a mortgage industry publisher. It is that there is not enough money available for making loans.

"The liquidity problem hasn't changed," Gumbinger said. "The primary issue is trust between buyers and holders of debt." Investors holding worthless or heavily discounted paper are not eager to buy more.

As a result, Gumbinger said problems in the housing market problems are too entrenched for a Fed rate drop to have an immediate impact.

Trust can take time to rebuild. Something that might speed the rebuilding process is better-than-expected earnings from the major Wall Street banks. Tuesday, Lehman Brothers' reported higher-than-forecasted profit, which allayed fears about the wallop that the mortgage crisis may inflict on Wall Street. Goldman Sachs, Morgan Stanley and Bear Stearns are due to report earnings later this week.

Home prices in many parts of the country remain out of reach for average Americans, leading to slow sales and lengthening inventories of houses on the market. Also adding to listings is a flood of new foreclosures hitting the market.

That inventory is weighing heavily on housing markets, according to Zandi, and much of it will have to sell through before prices start to rise again.

It didn't help market confidence that venerated ex-Fed head Alan Greenspan came out and opined on the possibility of double-digit housing price declines, according to Dean Baker, an economist and co-director of the Center for Economic and Policy.

"That has to be very worrisome for anyone lending into these markets," said Baker.  Top of page



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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.