Interest Rate Cuts are (still) Off the Table and Increases by the Federal Reserve are VERY Unlikely Before the End of 2007
Posted on June 11, 2007
Filed Under Politics, Real Estate Investing |
The stock and bond markets are turning bearish, real estate has not started to recover. Inflation is still straining against the restraints the Fed has placed on it. But, the economy is growing and the unemployment rate is amazingly stable.
The experts who were proclaiming the imminent lowering of rates by the Federal Reserve are now wringing their hands worrying about an increase.
Looks pretty dismal doesn’t it? Why the change and is it really all that bad?
What you are seeing are the micro gyrations of macro market conditions.
As other countries have been adjusting their monetary policy investors have adjusted their short-term strategies.
But, what does it all mean here to the average real estate investor?
Not much.
See, local markets and all real estate is very local, are driven to a larger extent by local factors. Lenders have basically the same problem builders have. The lenders make most of their profits not by holding or servicing mortgages but by initiating and closing them. If interest rates are too high in an area and are discouraging borrowers from buying the lenders will lower the rates in that area. This used to be little problem for lenders because it was unlikely someone in say Dallas would find out that someone in Little Rock was getting a better rate on the same type of loan with the same terms and similar credit and income ratios. Today, the borrowing consumer has much more information at their fingertips than ever before. It is harder for the lenders to regionalize their rates to maintain loan originations in sagging areas. As a result, the interest rates across the country are more uniform than ever before.
Mortgage rates are going to continue to be driven by the competitive nature of the lending market. Yes, over the next few months we are likely to see more of the marginal lenders go under. And yes, over time that means the remaining lenders might be able to inch rates up. But, as long as the current Fed rates remain near their current levels they are not going to be the driving factor in local mortgage rates.
My best guesstimate remains unchanged, I do not anticipate any change in the Fed rate unless the current market conditions change substantially. The Fed has demonstrated their desire to try everything else at their disposal before adjusting rates up or down.
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