Real Estate Outlook: Fed Rate Cut

Written by Posted On Wednesday, 19 March 2008 17:00

There's no other way to put it: Things got pretty tense in the financial markets earlier this week -- with the Federal Reserve's dramatic steps to inject billions of dollars of liquidity on Wall Street, plus the failure of giant investment bank Bear Stearns.

Then came the Fed's big three quarter of a point rate cut on Tuesday -- and promises by Fed chairman Ben Bernanke to keep supporting the capital markets in creative ways for as long as needed to spur new economic growth.

When the global financial system shakes and shudders like it did, the tremors are felt in every major segment of the economy that depend on capital -- and of course real estate is high on the list.

So what might all this mean for home buyers and sellers?

Number one, focus your attention on what Mr. Bernanke said: The Federal Reserve is NOT going to let the economy go down the drain because of some dumb subprime loan investments made by Bear Stearns and other large banks during the boom.

The Fed is probably not finished cutting interest rates -- and ultimately that should exert downward pressure on mortgage rates and help housing and real estate.

But we've got to be frank here. There's a potential dark side that is not getting much public attention yet: Major lenders may not pass along all those lower rates to home buyers.

What we're seeing this month from Fannie Mae, Freddie Mac and big banks are a series of new "add on" costs to loans plus higher minimum downpayments.

The add-ons are for credit scores below 680, houses located in "declining" markets, and new "jumbo" loan amounts above $417,000 authorized by the economic stimulus package. The net effect may be to limit -- or even cancel out -- the beneficial effects of the Fed's cuts to base interest rates.

Now despite all this, there continue to be clear signs that the housing market itself is finally bottoming out of its nearly three year post-boom correction. One sign we saw this past Tuesday was in new housing starts, which came in at a surprising 1.065 million annual rate, well above the 980,000 to 990,000 most analysts had predicted.

Ara Hovnanian, CEO of Hovnanian Enterprises, a major builder, told CNBC's "Squawkbox" program Tuesday that three straight months of essentially flat housing starts means the worst of the housing slump -- at least for new construction -- is probably now past us.

That doesn't mean happy days are here again, but it does point to gradually improving real estate conditions in the months ahead.

We'll see and we'll keep you posted every week.

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