Home Front

A blog about the economy and the Sacramento-area real estate market.

March 18, 2008
Bernanke makes his move

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The Federal Reserve just announced that it has cut the federal funds rate - the rate which banks charge when borrowing from one another - by three fourths of a percentage point to 2.25 percent.

Here is the official announcement.

OK, so what does this mean here in Sacramento?
The Fed cut will have no immediate or major effect on the Sacramento-area real estate market. It WILL bring a nice drop in monthly payments for people with home equity lines of credit (plenty of those in the Sacramento area) and probably cause less severe monthly hikes when adjustable-rate loans reset to newer interest rates.
Mostly, if it calms financial markets it lessens some of the economic instability that is only making things worse for the housing market.

Above all, remember: what the Fed has done is not the same as lowering interest rates on mortgages. Home loan officials say they always get a deluge of calls after a Fed interest rate cut from people who want to refinance.

Mortgage rates do tend eventually to follow the direction of Fed cuts. But they are unpredictable and subject to a lot of bigger economic and global forces. They are also affected by the supply of money to lend, which has been limited as banks and Wall Street plow through this financial upheaval. Limited supply can equal higher prices for mortgages.

Lately, indeed, mortgage rates have been going up, even as Fed rates have been lowered. Mortgage giant Freddie Mac reported a national average of 6.13 percent last week for the 30-year fixed-rate mortgage, up significantly from a low of 5.48 percent the week of Jan. 24. That was the week the Fed cut rates by three quarters of a percentage point to 3.50. A week later it cut rates to 3.0 percent and mortgage rates have largely risen since.

As a general rule, rates fall on fears of economic weakness and rise on fears of inflation. Right now we have some of both, which reminds me of what Jeff Tarbell, managing director of Sacramento-based Comstock Mortgage said on his AM 1140 radio show last Saturday: What are rates today? What time is it?
- MSNBC Photo

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