“The Federal Reserve lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years, hoping to keep the U.S. from sinking into a recession sparked by spreading housing-market fallout.”
And while (according to our lawyers) we don’t condone betting, it’s time to make good if you participated in the friendly wager. Then again, you could always go double or nothing on the actual impact on mortgage rates (if any) and local sales.
Fed Lowers Rate to 4.75 Percent, First Cut Since 2003 [Bloomberg]
JustQuotes: Why Listen To This Guy About The Housing Market? [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by sw

    This won’t help housing. Mortgage rates are more closely tied to the 10-yr Treasury rate, which is heading up as investors flee the dollar.

  2. Posted by bird_man

    This does nothing for the housing market….

  3. Posted by anon

    It already has helped. 10-year treasuries priced in the anticipated cut a month ago. Additionaly, the cut reduces monthly payments for other floating short term debt such as credit cards.

  4. Posted by answerman

    Will this reverse the housing problem? Of course not.
    Are those saying that this will do “nothing for the housing market” wrong? Of course they are.
    Anyone with home equity line that’s tied to prime saves money. For those squeaking, this helps. Plus, as noted, other floating short terms debt is lowered, too.

  5. Posted by marc

    The problem is much more complex than simply fed rates as applies to nonconforming mortgages, so the significance of this to real world borrowers and sellers is less than for other parts of the state and more so nation.
    -marc

  6. Posted by vox

    “This won’t help housing”
    Well, OK but for conversation’s sake, several hundred billion dollars’ worth of market say so in a major leading indicator don’t share your opinion.
    Leaders in Price Performance (Intraday)
    Steel & Iron +7.06%
    Surety & Title Insurance +6.31%
    Department Stores +6.18%
    Industrial Metals & Minerals +6.02%
    Building Materials Wholesale +6.01%
    Cement +5.84%
    Metal Fabrication +5.63%
    Foreign Money Center Banks +5.62%
    Residential Construction +5.27%
    Foreign Regional Banks +5.25%

  7. Posted by tim

    Hope no one was planning on tapping their home equity to travel overseas or buy a BMW:
    “The dollar fell to a record low against the euro after the Federal Reserve cut its benchmark interest rate by a half-percentage point to 4.75 percent, the first reduction since 2003. The Dollar Index against six other major currencies sank to the lowest since September 1992 after the Fed cut its target rate for overnight loans between banks by the most since November 2002 amid concern that the worst housing slump in 16 years and increased borrowing costs for companies may threaten economic growth.”
    Mortgage brokers and realtors might be smiling but individual homeowners just got screwed.

  8. Posted by bird_man

    Yes, the markets had a good day, didn’t see that coming(!) and I can agree with answerman.
    How about….
    Laggards in Quarterly Revenue Growth (YoY)
    Residential Construction -21.49%
    Manufactured Housing -19.97%
    Real Estate Development -17.45%

  9. Posted by anon8mizer

    Naive economics question – When the fed cuts rates, does that mean the US government will take in less interest payment from the banks? That means the government will have less to spend on tax payers, right?

  10. Posted by Dave

    Ohhh Missionite….. Round 1… How does Paypal sound?
    Dave

  11. Posted by tipster

    Builders take out short term loans when they build. And then they buy construction materials and equipment. So it means they will build even more houses because it just got cheaper for them to do that. And with the price of land falling like, well, like a rock (pardon the pun), it is now profitable for them to continue to build, because they can sell for significantly cheaper prices to meet the falling market demand and still make a profit.
    Home equity lines of credit are also short term interest. So consumer spending may tick up.
    But mortgages are tied to longer term rates. So this helps the housing market contribute to the economy by allowing the price of new housing to continue to fall, faster than it otherwise would.
    So by indicating that he was abandoning his inflation fighting role, and thus scaring lenders of long term money into believing they should charge even higher rates, Ben Bernanke just pulled off the impossible: he helped the economy while not bailing out homeowners.
    Had he only dropped rates by .25, this would not have been so. Three cheers to the fed: my hero.

  12. Posted by Jordan

    anon8mizer,
    This could be a wash. Banks will benefit from a steeper yield curve, but individuals will take in less for their short term deposits.
    In any case, the Fed made a huge mistake by caving to Wall Street expectations. Their primary goal should be price stability.
    Well, the dollar is dropping (and has been for some time), gold and other commodities are sky high and inflation (including energy and housing) has been above the Fed’s 1-2% per year bogey for some time. (and don’t get me started on CPI, what a bogus statistic)
    Hello moral hazard! Now Wall St. can expect a Fed bail out every time a ‘major’ crisis erupts.

  13. Posted by marc

    The CPI is as malleable as the Dow Jones Industrial Average–whenever a component threatens to drag down rosy numbers, the statisticians simply eliminate it. Problem solved.
    TO what extent are petroleum prices only high when measured in weak dollars? Even so, one might think that higher energy costs would raise prices and drive inflation higher.
    And if inflation is not being calculated honestly and interest rates need to take inflation into account so that banks don’t lose money lending at a rate that does not keep up with the value of the currency, then how does this sleight of statistical hand impact on real interest rates?
    -marc

  14. Posted by missionite

    I’m here, and ready to keep my end of the bet. PayPal is fine. Hook me up with an email and I’ll take care of it promptly.
    A half point! Crimminy. Looks like you got a better then even shot at making the back bet as well.
    Ah well, at least the resulting inflation means the bet is worth less.
    What a way to stick it to people with savings like me. All you homeowners can thank me now for bailing you out. grr…
    [Editor’s Note: We’ll take care of the email exchange (next time we’re structuring a cut for the house). And kudos for making good on the bet.]

  15. Posted by Jordan

    marc,
    I think you are being flip about the CPI. Governement statisticans don’t eliminate ‘bad figures’ wily-nily. The issue is more systemic than that.
    I have a problem with CPI because of the way it accounts for technological improvements. Every year they adjust the price of, for example, computers to reflect that fact that the computer you buy this year for $1,000 is more powerful than the one you could buy last year for $1,000.
    My issue with that is if every year they adjust down CPI for these changes, you end up with inflation number that doesn’t synch with the reality we face at the cash register. The changes they make to CPI for this adjustment aren’t giant, but over time, they are substantial.
    On petroleum, no one raised any points about the cost oil. I don’t understand your question. Are you trying to ask why oil prices are high when oil is priced and traded in dollars?

  16. Posted by ex SF-er

    We’ve all debated endlessly about whether or not the Fed dropping rates will “save” housing. Now we can sit back and watch what happens.
    Anybody who is smart is fleeing the dollar. Ben Bernanke has officially earned his “helicopter” nickname. Now we know that he will drop and drop and drop again, just like his predecessor.
    I held on and believed for a while. No more. I’m tired of seeing my life savings destroyed by inflation so that Angelo Mozillo can get $500 million in stock options and Goldman Sachs pass out hundreds of millions in bonuses. and then when they take the slightest hit they’re bailed out.
    next on a channel near you: sky high gas and food prices, as well as sky high import prices.

  17. Posted by Craig

    ex-SFer: What kind of investments make sense in this environment Ben is creating/has created? Sorry for the naivety in advance.

  18. Posted by marc

    Jordan, the Commerce Department omits volatiles such as housing, food and energy from the CPI. So the CPI is not an accurate measure of the loss of purchasing power, inflation of the currency in the domestic economy.
    In general, energy is an input to every economic process. If the price of energy is rising, then inflation should ripple through the economy as it did in the 1970s. Yes, there is more growth now than then, but the price of energy is still at record highs. We might expect for that to be hidden in the CPI numbers as it is too volatile, but higher raw energy prices will cause the price of everything to rise to some extent.
    Now, the price of petroleum is measured in dollars rather than sterling or euros. So as the dollar devalues relative to the stable currencies, the price of petroleum is not rising quite as fast given that it is measured in shrinking dollars.
    I’m just trying to get my mind around the relationship between inflation, the value of the currency and interest rates for housing. At some point, the rising cost of energy inputs, both relative to the dollar and in absolute terms is going to put upwards pressure on inflation which would drive interest rates higher so that banks don’t lose money lending out more expensive dollars and getting paid back in less valuable bucks.
    -marc

  19. Posted by Jordan

    marc,
    CPI includes Energy, food and housing. You are confusing CPI with core CPI, which measures ‘core inflation’ and excludes food and energy (but not housing).
    As far as oil goes, the only price that matters for Americans is the price in dollars, which is at record prices ($80!!). The price increase for consumers in Euroland, for example, is lower due to their currency’s stregnth against the dollar. However, that doesn’t mean squat for people in America, which is why your question confused me.
    I’ll steal from Milton Friedman here and end with: “inflation is always and everywhere a monetary phenomenon”. The Fed caused the irrational increases in house prices and commodities as well as the depreciation of the dollar by cutting rates so deeply and holding them there for so long.

  20. Posted by SerialJingleMailer

    Jordan @ 3:05, “fac[ing] reality at the cash register” would mean buying last year’s $1000 computer today for whatever the market would now bear (<$1000). That would be the exact same thing as the deflation you’re pointing out, except that you’re saying “New computers now cost >$1000!” and calling it hidden inflation. It is necessary to take into account these technological improvements. It’s not flimflammery. Even if it was a falsehood, aren’t you the one defending the “government statisticians” against accusations of “eliminat[ing] ‘bad figures'”? You contradict yourself. Who do you think produces the CPI? Someone else (“the system”, from the sound of it) *besides* government statisticians?

  21. Posted by Jordan

    SerialJingleMailer,
    You misunderstand my point. By citing the example of the computer that doesn’t change in price from year to year, I was making the point that CPI is somewhat arbitraily adjusted downward to reflect the increased computing power (i.e. technological improvement). However, this downward adjustment to the CPI has the effect of making the inflation rate lower than what consumers actually experience at cash register.
    This adjustment makes CPI a less useful statistic for measuring the increase in prices across the economy.
    This sort of distortion is not ‘wily nily’, but completely transparent. It is not a case of governement statisticans ‘eliminating bad figures’ at will.

  22. Posted by Dave

    Missionite,
    I’ll share more of my personal side when we talk offline but thank you for comming to the plate.
    Special thanks to Socketsite for featuring this..Overall we are all in on “the bet”..keep it plugged in
    Dave

  23. Posted by ex SF-er

    craig:
    your question isn’t naive at all… in fact it’s (seriously) one of the hardest questions to answer!
    I am personally reeling trying to figure out how to best save/invest in this environment. so please take my musings as just that, ramblings of a person who feels betrayed. (I am a saver, and so dollar devaluation hurts my hard earned savings). I have no more idea as to the “answer” than you do, and if I did I’d be super rich.
    I am personally going to invest in many things:
    American stocks
    Foreign Stocks
    gold/silver
    Treasuries
    Oil
    Staples (it’s a commodity play without being in commodities)
    This way hopefully something will do well…
    The Fed basically said that they would only drop rates if it affected the “real” economy (in other words if we were headed for a recession or depression)
    thus, by dropping not 25 but 50 basis points it means that they had what they felt was evidence of impending recession/depression (and I agree that we were for sure headed for recession, and they had far more data than I do!)
    Our economy (GDP) is based on consumption (75% of our GDP comes from consumer consumption!) American wages haven’t been growing, so this consumption has been maintained by DEBT over the last 5-6 years or so. (so people borrowed money to spend… this spending increased our GDP but it also increased consumer debt).
    This debt driven economy sputtered this summer… so all the guilty parties (the over-indebted and those who foolishly lent to them) were collapsing. This of course caused lending problems, which meant less borrowing, which meant less borrowing to consume, which meant slowing GDP and possible recession.
    Now the Fed has lowered rates. Who does this help?
    1. people who have lots of debt.
    2. people/businesses who lend to those with debt.
    3. people or businesses who do business with #1 and #2.
    who does it hurt
    1. savers
    So the 100 Trillion dollar question:
    Will the Fed Funds Cut be enough, and can it act in time to save over-indebted borrowers and businesses who lent to them, allowing the overindebted to start borrowing again, which will get them spending again, which will pull us out of recession?
    I don’t have the answer to that question. And that is the crux of how to invest here.
    IF YOU BELIEVE THAT THE FED DROPPING RATES WILL WORK:
    -then I would invest in the stock market (lower rates mean higher borrowing and higher consumption, meaning higher corporate earnings, thus higher stock market)
    -and invest in banks/financials (since they can now borrow cheap and lend at a profit, instead of going bankrupt)
    -and consider investing in raw materials (higher GDP, higher use of commodities, etc)
    IF YOU BELIEVE THAT THE FED DROP WONT WORK:
    now instead you will have massive inflation of the dollar (dollar becoming worth less) but the economy still drops to recession, so you would
    -invest in gold (gold sometimes rises when the dollar falls in value, as people flee a depreciating dollar)
    -consider oil (oil may rise in price mainly because dollar is dropping in price again)
    -consider commodities (again, dollar is worth less, so commodities are more expensive)
    -consider foreign currencies (but know what you’re doing) or foreing stock markets. not because they’ll do well, but because they are denominated in foreign currencies which may do well compared to the dollar…
    but regardless if the fed succeeds or not, we have higher inflation as of this afternoon. few people stop to think about the fact that Stocks ROSE in price, Gold ROSE in price, many commodities ROSE in price, Euros ROSE in price, Yen ROSE in price… these didn’t really become worth more, the dollar was worth less!
    the trick is to see if you can lose LESS than others if the Fed’s action doesn’t work, or if you can EARN MORE than inflation if the Fed’s action does work.
    but the true lesson learned here is this:
    borrow as much as you can, get way over your head, make risky investments as well. make big bucks on the way up. if you get into trouble, the Fed will bail you out. if you’re a saver you’re a sucker… your life savings just took a hit through dollar devaluation (I’m a sucker)
    hope that helped

  24. Posted by Trip

    In SF, this might help grease the housing market, but just a tiny bit. This cut makes no difference at all in the new requirements for much higher down payments, income verification, high income, and high credit score put in place by lenders (buyers of CDOs are demanding those — even if rates were cut to zero). So the pool of qualified buyers is unchanged with this cut, and much smaller than 2 months ago when you needed no money down and no documented income to get a mortgage. Those new requirements are the biggest force putting downward price pressure on SF markets (e.g. instead of 10 qualified buyers for every property, there are now 2 or 1 or none) along with the sense that it is probably not too smart to be buying into the start of a decline.
    But this might move jumbo loan rates down a tiny bit as they tend to track fed rates — but treasury rates are up on the fears of inflation this move could spur, so who knows? If jumbo mortgage rates head down a bit, maybe those buyers who can jump in will be a bit more willing to do so with slightly lower payments available.
    But boy, this sure is great for the equities markets. If you’re just in the housing market for investment purposes, the S&P 500 has done quite a bit better than SF housing prices over the last 4-5 years, and Wall Street really liked this move.

  25. Posted by anon

    Trip your last paragraph is true, with the huge exception of leverage. I made far, far more cash by investing $100k four years ago into an SF condo and borrowing tons of cash from the bank, then selling, than I ever would have by investing into the stock market…unless E*Trade was going to give me a million bucks to play with on top of my own $100k.

  26. Posted by ex SF-er

    Some news that may be more important for SF home prices.
    A bill just passed the House that would potentially raise the FHA loan limit to $729,750.
    http://asia.news.yahoo.com/070918/ap/d8ro5lko0.html
    we’ve talked about bailouts before on Socketsite. I’ve said many times that nobody can foresee the future specifically due to government intervention.
    Thus, today our country decided to:
    1. drop the Fed Funds rate (quite likely the first of several drops)
    and
    2. Increase FEDERALLY guaranteed loans up to $729,750 (why is a low or middle income person buyng a home for 3/4 million anyway?)
    I personally believe that the Fed Funds Rate decrease will not help home values much, even in SF.
    But if this new FHA proposal passes and becomes law (with more surely on the way) that could slow housing’s decline.
    and before you get too happy, FHA loans are guaranteed by the govt: in other words your tax dollars. so our tax dollars will be spent helping get people into $729,000 homes.

  27. Posted by TraderJoe

    Anon: It’s called a margin account and the problem with leverage is that it’s a bitch when it’s working against you (ask the guys at Bear Sterns that bet on housing). You’re living in the past if you think the next four years are going to look anything like the last. A home is a great place to live but it’s a lousy investment compared to the stock market.

  28. Posted by Trip

    Anon 6:36 — good point about leverage. In fact, given California’s anti-deficiency statute (can only go after your home if you default, not your personal assets, assuming you did not refi), because many lenders were willing to lend home buyers 100% of the purchase price — i.e. infinite leverage — a buyer had the opportunity for great upside with no downside risk. A good deal for buyers — pretty easy to see how such lending practices fueled the bubble.
    As TraderJoe noted, investing on a margin account is common with equities too. And just as many big Wall Street players have learned, leverage can bite hard in a downturn (no anti-deficiency statute governing margin investing in the stock markets). The same can happen in housing if you put up some of your own money — you lose it all with a fairly small reduction in prices. (The smartest guys are the hedge fund managers who somehow get folks to give them their money to invest, and the hedge funds get a huge chunk of the profits but take on none of the downside risk).
    But, as I noted, those days are over in the housing world. Now that buyers have to put up significant amounts of their own money, they either can’t, or don’t want to jump in anymore. That’s the main reason nothing is moving in SF and prices are falling.

  29. Posted by ex SF-er

    “Now that buyers have to put up significant amounts of their own money,”
    Trip:
    but if the FHA bill passes the Senate and becomes law?
    They want to eliminate down payments and have a limit of $729,9000…
    gov’t secured.
    party on.
    transfer the risk from the banks (who played and got burned”) to the taxpayer.

  30. Posted by dub dub

    The big difference between margin account leverage and house leverage is there are no margin calls with the latter — as long as you pay your nut, you can’t be forced to liquidate. You don’t lose anything until you sell. This is huge.
    If you put 20% down on a house (conservative!!!!) you’ve got 5:1 uncallable leverage right there. Unheard of for retail stock investors (excluding option strategies, which open new cans of worms). Of course housing carrying costs (taxes, upkeep, interest) are much higher than for stocks (basically zero), even after tax breaks.
    A very highly leveraged house has serious carrying costs, and buyers leveraging because they “have to” can’t stomach the costs and have to sell in a declining market. The gadgillion dollar question is how much of the bay area housing market is made up of these punters?
    We won’t know till we know. Someone asked advice about investing, and if it wasn’t a troll, why not consider indexing all your money broadly, build a business or career and live your live fully? Nobody on this board (esp me) knows what’s next.
    And be lucky one of your biggest problems is the rising cost of foreign cars/vacations as the dollar tanks ;)

  31. Posted by marc

    Jordan, if the USD were within historic norms, then the $80/bbl price would be like $40-50/bbl levels, well within the higher end of the historic range rather than off the scale setting records.
    For us, this is how we pay for the Iraq war, and it impacts on the broader economy have been, are and will be a component in the instability we’re seeing.
    But there are too many moving parts here for my limited economic knowledge base to understand how they interrelate.
    Again, at some point interest rates have to reflect inflation or the banks will lose money on loans.
    -marc

  32. Posted by KK

    “Jordan, if the USD were within historic norms, then the $80/bbl price would be like $40-50/bbl levels, well within the higher end of the historic range rather than off the scale setting records.”
    Crude is priced in dollars, so the dollar weakness is not what is driving prices higher. The spike over the last couple of years is based on demand, real and anticipated, mainly from emerging market countries such as China and India as well as from more developed countries. Self-imposed production contraints from OPEC also have impact prices.

  33. Posted by curmudgeon

    “crude is priced in dollars, so the dollar weakness is not what is driving prices higher”? What?
    If the dollar decreases in value against world currencies, then assets priced in dollars (like oil) become cheaper to the rest of the world (but not to us). This definitely tend to increase upward pressure on oil prices, as producers will want it to increase, and non-US consumers will be able to afford to pay for this increase with their stronger currencies.
    Am I missing something?

  34. Posted by marc

    KK, How much of what we’re seeing is due to cheaper dollars and how much is due to pricier petrol?
    How much from column A and how much from column B?
    That differential would be energy’s contributing factor towards real inflation.
    In addition, one might speculate that on reason why urban center real estate in the US (NYC, SF) is overvalued is that given the dollar’s weakness to people with sterling and euros makes it an attractive investment in the same way that Mexican one sees inflation in the parts of Mexico where there are many dollars competing with pesos.
    -marc

  35. Posted by Dude

    Best way to get out of a hole? Dig yourself out:
    http://biz.yahoo.com/ap/070919/debt_limit.html?.v=5

  36. Posted by anon

    “If the dollar decreases in value against world currencies, then assets priced in dollars (like oil) become cheaper to the rest of the world (but not to us). This definitely tend to increase upward pressure on oil prices, as producers will want it to increase, and non-US consumers will be able to afford to pay for this increase with their stronger currencies.”
    You are not missing anything. In Europe, oil is actually cheaper this year than it was last year. The reason oil prices are going up in the US is that the USD is falling like a rock. Ben & Co. just printed a whole lot of new money yesterday. Essentially devaluing the US currency. In EUR terms, SF real estate did not go up. The EUR is up from $0.8 to (almost) $1.4 since 2002. This is what’s happening. The USD is becoming worthless and real assets like real estate, oil, gold, etc. go up as the USD goes down. Great policy!

  37. Posted by marc

    Inflation is how we pay for wars, the last great bout of inflation was during the Vietnam invasion, and lasted from the late 1960s until about 1982.
    Inflation is now how we pay for housing as well, given that the subprime slouches are being bailed out by easy money.
    The good thing is that for those of us with stable mortgages, inflation and devaluing of the currency means that we will end up paying much less over time for our homes as we’re paying down the principles with ever more worthless dollars as inflation rises, the dollar falls and housing prices drop slightly for us over the near term here in SF.
    -marc

  38. Posted by KK

    The long-term trend of increasingly expensive oil is not a primary result of the weaker dollar. In terms of recent performance, yes a weaker dollar has put upward pressure on price, but primarily the cut in interest rates “is seen as a positive for economic growth and therefore energy demand.” (WSJ). Also higher prices are being supported by forecasts of declining US stockpiles.
    Quote from a research webiste:
    “Supply and demand fundamentals favor continued commodity price increases”
    “After the peak of commodity prices in the 1970s, which led to overcapacity and falling prices, there was a 20-year period of underinvestment in commodity supply infrastructure. It can take many years to bring new capacity/supply on line to meet the (growing) demand. So prices may continue to face upward pressure. On the demand side, the role of the emerging markets and China in particular as a growth driver is well understood. As developing markets industrialize and modernize, their per-capita consumption of energy and other raw materials increases substantially.”
    “How much from column A and how much from column B?”
    From what I can gather, there’s been about 17% increase in futures over the last four weeks as a result of the looming cut, but again, a majority of that is due to expected worldwide economic expansion and stockpiles.
    Here’s a good primer on the history of increases over the last few years:
    http://en.wikipedia.org/wiki/Oil_price_increases_of_2004-2006

  39. Posted by marc

    Thanks, KK.
    From the NYT:
    http://www.nytimes.com/2007/09/21/business/worldbusiness/21dollar.html?pagewanted=2&hp
    Investors dumped dollars yesterday, sending the euro to a record high and putting the American currency at par with the Canadian dollar for the first time in more than 30 years.

    On the other side of the equation, the decline in the American currency is helping push up commodity prices, most of which are denominated in dollars, and kindling fears that inflation could rise. Crude oil futures surged to $83.32 a barrel yesterday, up 2 percent from the day before and up 37 percent for the year. Long-term bonds fell sharply in value and gold prices were up 1.4 percent, to $733.26 a troy ounce.

    In Washington, the administration and Congress were preoccupied with the problems in the housing economy and there was little talk of the dollar. President Bush expressed confidence in the economy. “The fundamentals of our nation’s economy are strong,” he said at a news conference. “There is no question that there is some unsettling times in the housing market.”

    For decades, the Canadian dollar’s anemic state lent it little respect. Although the currency’s popular name, the loonie, comes from the bird depicted on the one-dollar coin, its alternate meaning was not lost on Canadians. In an episode of “The Simpsons” about the animated family’s trip to Toronto shortly after the Canadian currency’s collapse in 2002, Homer Simpson won over a recalcitrant security guard by waving a single American dollar bill in his face.
    -marc

  40. Posted by marc

    This too:
    In practical terms, the recent drop in the dollar’s value is making Boeing jetliners and Manhattan pieds-à-terre a lot cheaper for Europeans and Canadians, while Americans will have to pay more while on vacation in Paris or when buying snowmobiles made in Quebec.
    If a pied-a-terre in Manhattan, why not a condo in SF?
    -marc

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