The known: the Federal Reserve has cut both its benchmark interest rate and discount rate by 25 basis points (a quarter percent) while signaling that further cuts are unlikely.

“Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,” the Federal Open Market Committee said in a statement after meeting today in Washington. “After this action, the upside risks to inflation roughly balance the downside risks to growth.”

The big unknown(s): will the cuts help revive our national housing market? And of course, what impact (if any) will the cuts have on mortgage rates closer to home?
Fed Lowers Rate by a Quarter Point to 4.5 Percent [Bloomberg]
U.S. Federal Open Market Committee Statement: Text [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by missionite

    OK Dave, you got another 25 basis points to go before the end of the year before I owe you another $25. I’m feeling pretty good about my chances though, as inflation is clearly starting to be a concern.
    And of course, should I be victorious, I’ll have to come up with as cool a charity to donate the winnings to, as you did with our last wager. :)

  2. Posted by seehsee

    This is probably a stupid question, but does this cut mean it might be worthwhile for me to explore refinancing my 30-year fixed (which I took out Sept 06)? I’m not clear on whether or not these cuts impact mortgage rates of this type.

  3. Posted by Jimmy

    The impact of this will be… housing prices in San Francisco continue to rise. As usual.

  4. Posted by james

    how many of you have scaled back your purchasing in the past few weeks, be it for fear of a shrinking economy, employer downsizing, locked up equity you can’t cash out in this market, etc….

  5. Posted by scurvy

    This won’t affect 30 year mortgages at all. 30 year mortgage rates are related to the yield on the 10 year. The 10 year’s yield is determined in the open market. The only way mortgage rates will go down is if the Chinese and Arabs buy the 10 year at a greater rate than they already are. They’re already skittish with the amount of (weak) dollars they own. It aint happening.
    Think the rates are always related and will move together? Go look up “Greenspan’s conundrum”

  6. Posted by Trip

    This cut may have some impact on ARM rates, but probably not much. Fixed mortgage rates are more closely tied to bond and Treasury rates, and those both spiked a bit on today’s cut (inflation fears and comments from the Fed that further rate cuts are unlikely). So you certainly might look into refi options, but don’t count on any significant mortgage rate changes from today’s news.

  7. Posted by anon

    Well, rates on equity lines are now down by 3/4 point, and 30-year mortgage rates are back to where they were a year ago…not too shabby.
    And I for one have increased my purchasing if anything. The global economy is doing the best it has, EVER. I refuse to live in a media-led state of fear.

  8. Posted by Jimmy

    Actually, I’ve scaled back my spending but that’s only because I don’t yet know where my next paycheck after Dec. 31, 2008 (14 months from today) is coming from…
    the joys of small business!
    Needless to say I am way too conservative to buy real estate in this town.

  9. Posted by amused

    Thinking of an Aston Martin when my current renovations are completed. But not planning on a refi in any case.

  10. Posted by Michael

    The 10 year treasury yield ended the day UP about 9 basis points. Expect mortgage rates to rise accordingly.
    http://www.bloomberg.com/markets/rates/index.html

  11. Posted by John

    The cut is not targeted at the mortgage rate directly. The fed is concerned about the economy, not the housing market.
    However, since this is a positive factor for the economy, it will indirectly help the housing market in two fronts: higher inflation (higher rent), and more income in people’s pocket.
    The 10 year treasury rate increase is really an indication of the flight to quality in the financial market. People are moving away from risking investments (subprime, and probably junk bond) into quality investments (treasury, and probably prime mortgages).
    My belief is that when everything is over, people with good credit will see lower mortgage rates in the 6% range, while people with bad credit won’t get mortgage at all.

  12. Posted by Leroy

    Libor is where most of the arms are adjusted to, and most 30 year fixed gets prices off of the 10 year. Depsite 75 bps of cuts, there hasn’t been that much of a decline in rates. The realy question is will the 10% price declines -so far- that have hit San Diego and the central valley hit a tradionally sheltered market like SFO.

  13. Posted by Michael

    “The fed is concerned about the economy, not the housing market.”
    One and the same as far as I’m concerned. It’s the subprime mess that led to the credit meltdown and it’s the overall housing slowdown that’s threatening the broader economy.

  14. Posted by Jamie

    Employment report Friday … this is fun. Personally, I feel safely employed – my business doesn’t depend too much on the whims of consumer spending.

  15. Posted by ex SF-er

    “The 10 year treasury rate increase is really an indication of the flight to quality in the financial market. People are moving away from risking investments (subprime, and probably junk bond) into quality investments (treasury, and probably prime mortgages).”
    John, you’re confused (your logic is backward).
    The 10 year treasury interest rate (called its “yield”) is INVERSELY proportional to it’s price. In other words, if Treasury rates RISE, it’s because its price FELL.
    in a flight to quality, everybody buys treasurys (because they want something safe). This makes the treasury price go UP and treasury yield (aka interest rate) go down. but investors are willing to do this because they are looking for safety, not yield.
    In todays case, what is happening is that investors are deciding NOT to buy longer term treasurys, thus their price is FALLING, and that makes their yield go UP. (the yield is the same as the interest rate)
    Another way to think about it is this way: when nobody wants to buy a treasury, then the govt has to offer a higher interest rate to get investors to buy them.

  16. Posted by anono

    short term treasury yields have been falling. About half of all ARMs are tied to the one year treasury constant maturity rate, which is now at 3.97%, down from 5.07% one year ago.
    the predictions of higher mortgage rates after the 50bp cut were wrong, and the predictions of higher mortgage rates after this 25pb cut will not be realized either. People have been predicting 7% mortgage rates for two years. Hasn’t happened. Won’t happen anytime soon. I’ve been getting flooded with refinancing offers lately for no fee, no points fixed rate mortgages. The banks appear to think rates are going lower.

  17. Posted by Jamie

    Are yields rising because the Fed indicated they believe the risks of inflation and economic slowdown are about equal now (and won’t likely cut again in near future)? or … are yields rising because foreign investors are taking their money elsewhere for higher yields and less perceived currency value risk?

  18. Posted by ex SF-er

    “However, since this is a positive factor for the economy, it will indirectly help the housing market in two fronts: higher inflation (higher rent), and more income in people’s pocket.”
    Perhaps. it depends on what happens to INCOMES. It also depends on whether or not we enter recession. (the Fed usually tends not to lower rates unless we’re entering recession!!!)
    If we get inflation in prices (as example: inflation of food, gas, heating oil, chinese imports) but we DON’T get inflation in wages, then people will have less money left over for a mortgage.
    We are already seeing price inflation (oil hit $94 a barrel today, a record, gold near all time highs, Euro/Pound/Canadian and Australian $ all near all time highs)
    so now the crucial next phase: will incomes rise too? or will global arbitrage (outsourcing) keep incomes down?
    The other key:
    will the lower short term Fed Funds Rate translate into lower mortgage rates or not?
    I’ve guessed many times here that it will not (at least not appreciably so). But I am actually very excited to see the Fed do exactly what I hoped they wouldn’t, to see if my thoughts on the sequelae come to pass or not!

  19. Posted by John

    Yes, ex-SFer, I messed up for a little bit.
    With flight to quality, the price increase, the yield goes down – which has happened after the subprime crisis unfold. Let’s stop lookin at one day’s movement, which is meaningless.
    In either case, the 30-year mortgage rate is not tied to the fed rate, but a reflection of the general market. My guess is that in 6 months, prime mortgage rate will drop to 6% range again. So, if you plan to buy, protect your credit score at all cost!

  20. Posted by scurvy

    I have no “on the ground” experience trying to get an ARM, but I keep reading that the ARM market has all but disappeared. Didn’t WFC stop offering them altogether? Or is this not the case?
    Re: 30 year mortgages vs 10 year yield vs fed funds rate — the devil is in the spreads folks, not the actual rates. It’s all about the spreads between the various bonds.
    http://finance.yahoo.com/charts#chart2:symbol=^tyx;range=1y;compare=^fvx+^tnx;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
    Notice how spreads are widening? The classic fade play is for them to converge….but nobody is willing to jump in front of that train yet for a variety of reasons.

  21. Posted by scurvy

    Hrmm nevermind that chart sucks. Let me try and find a better one that charts the actual yield versus a % comparison.

  22. Posted by ex SF-er

    scurvy:
    the ARM market is fine.
    What is struggling still (and should struggle) are the stated income/stated asset products, the no income/no asset products, as well as most option ARMs. Jumbo also was doing poorly but Prime jumbo with higher down payments is starting to return.
    This will take some time. The losses are still rolling in, and old losses are still not known for the big banks/investment firms due to accounting treatment. With the implementation of FAS 157 this may become more clear, as firms are forced to account for their assets differently. (It changes what can be marked to market vs marked to model, also called Level 1, Level 2, and Level 3)
    Most of the big losses right now are all in the mortgage arena, and not just “subprime”. (consider Bear Stearns, Merrill Lynch, and citigroup as well as Wells Fargo and BofA…) thus, it’ll take a while to figure out.
    Some of these firms may be insolvent, which is why the Federal Reserve and Treasury Dept are in panic mode, dropping interest rates 75 basis points despite a roaring economy (3.9% GDP). They are helping the big banks to create “super-SIV’s” to try to keep the damage off of the books of these corporations… hoping that they can buy enough time and enough spread that the big bank positions can unwind. “adding liquidity” as they say…

  23. Posted by tipster

    And now, Nov 1, the very next day, every indicator crashes. They should have cut more!

  24. Posted by anono

    mortgage rates moved to six month lows according to Freddie Mac. Expect more downward movement. I agree the cut should have been 50bp.

  25. Posted by Dude

    Yes, clearly. Let’s take real rates to zero like the Bank of Japan did. Worked wonders over there, right?

  26. Posted by Gdog

    Yes, jumbo ARM rates are currently low if you don’t go with a major player like BofA and have a downpayment. These credit unions are at around 6% and offer interest-only last time I checked:
    https://www.starone.org/site/rates.html#adjre
    https://addisonavenue.com/content/cu/rates/HomeLoanRates_html.asp
    Wells’ rates are higher, but that gap is closing from what it was a month ago:
    https://www.wellsfargo.com/mortgage/rates/

  27. Posted by ex SF-er

    Is there any question that the Fed will keep dropping rates? the problem of course is that it’s taking more and more punch to keep the crack addict markets high…
    I learned my lesson after the 50 bps disaster.
    gold and oil like everyone else. they are now nearing bubble territory too…
    but I’ll be darned if I’m going to just watch all my savings become worthless!
    tipster: I love the sarcasm, even though I’m not sure others appreciated it.

  28. Posted by Trip

    Rates are certainly a bit lower than they were not too long ago, and low by historical standards (even if they are much higher than 2003-04). But the real story for SF’s market is the tightening of lending guidelines. I read that Wells and others are now requiring at least 15% down on all loans in California and a few other states because of the very high risk that falling prices here will eat up any equity (and thus increase the likelihood of default/foreclosure). I’m sure some sources of loans with lower downs will be available (at higher rates), but far fewer buyers are now even eligible to buy in SF, much less willing, than was the case in the recent past. The secondary markets are forcing these requirements on lenders, so they will not be eased up any time soon. This has a much larger impact on demand than any interest rate moves we’re likely to see.

  29. Posted by badlydrawnbear

    hey, guess who invented Mortgage Backed Securities!?!?! … if you guess one of those guys from Enron, you’re close enough.
    http://en.wikipedia.org/wiki/Fastow#Early_career

  30. Posted by Dave

    How are we feeling today?

  31. Posted by Dave

    And the rate cut continues….another .25…
    Missionite – yes our money is worth much less but I promise to make sure it goes to another good cause… {we can discuss offline who}

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