When the minutes of the Federal Reserve's Open Market Committee meeting became known, revealing that most members were in agreement that the Fed may be nearing the end of its short-term rate raising cycle, the stock market -- DOW and NASDAQ -- posted the largest one-day gain since April 2005.
Let's hope it wasn't April Fool's Day.
The Fed has hiked rates for 15 straight meetings, bringing rates back to 4.75%. In turn, short-term interest rates push long-term mortgage interest rates (among other lending products). After hitting a low of 1.0% in the spring of 2004, the central bank's short term interest rates started to climb again. Today, they are just under 5 percent while mortgage interest rates are rising above 30-year-lows, sneaking back upward to just under 7 percent -- the highest rate in four years.
A new cap on mortgage interest rates could revitalize the real estate market, which is getting mixed reviews as to whether or not it's truly slowing down. Sales in 2006 are anticipated to approach or meet record sales set only two years ago. While that's certainly a slowdown from a record-setting 2005, it's hardly reason to panic that housing is a bursting bubble.
However, greater economic minds in powerful seats are starting to shift uncomfortably.
One person who may have single-handedly sparked the stock rally was none other than San Francisco Federal Reserve Bank president, Janet Yellen, who suggested in a speech to the Bay Area Council that the "impact of past rate increases has been delayed and could hit consumers harder than expected."
In other words, the Fed doesn't want to overcorrect in its zeal to keep inflation in check by raising short-term interest rates -- the rates by which Federal funds are borrowed by banks and repaid by charging consumers higher rates for short-term and long-term bank loans.
"I am increasingly concerned about the well-known long and variable lags in monetary policy -- specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected," Yellen said.
If Yellen isn't jellen', then there may be more to worry about, specifically the impact on housing.
Observing a "significant moderation" in house price gains recently, as well as a slowdown in home construction and sales, Yellen is concerned that a housing slowdown would depress job growth and reduce consumer spending, because consumers would no longer have rising equity to tap into.
"With this asset appreciating more slowly, consumers are likely to pull back on spending," she said.
In other data, the latest producer-price report showed a larger-than-expected 0.5% gain last month due mainly to rising gas prices. If you strip away food and energy prices, core inflation rose at a smaller rate than expected, which also may be giving the Fed pause.
"I would not want to prejudge future decisions to raise rates -- or to hold them steady -- but rather I will be highly sensitive to the implications of incoming data for the forecast for economic growth, employment and inflation," said Yellen.
What does this mean to you?
Lower interest rates are always good for real estate, particularly if real estate doesn't appear to be appreciating. That's the time to get in -- when it's not so volatile, and hold for a longer period. You have more choice of quality properties which are more likely to hold value and appreciate than those properties being lifted by market momentum.
With the oil and gas problem not likely to go away, look for commuter specials -- those homes near work and arts centers with public transportation that will offer easy access to neighborhood shopping, entertainment and jobs. More emphasis will be built on walking communities. You'll see developers creating the same kind of amenities for urban homebuyers as suburban homebuyers. Watch for infill properties to start including such amenities as gated entries, jogging trails, dog parks, and swimming pools (where appropriate.)
Any volatility in the market will rock stocks faster than housing, which will encourage people to sell while stocks are building or at a market peak, and park their money in real estate again.
