Can the Fed save real estate?

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By Matthew Stephens

Another rate cut was doled out by the Fed last week and was met with the largest rally in five years on the Dow Jones.

Is this latest cut enough to jump-start the stagnant housing market?

The Fed’s rate cut will indeed lower rates on a range of consumer loans, including home equity and mortgage loans. This effectively increases the number of home buyers able to make a purchase, which should increase demand, therefore lead to increased prices.

This is great news for homebuilders who now find themselves with completed new homes that are sitting on the market. These homes cost too money to allow to sit empty, and even with this rate cut, there is still a possibility of new-construction foreclosures.

It currently seems that there are more places to live than there are people to live in them. Homebuilders took their market as a given for the last few years, simply building where they could find land and letting the buyers come to them. Suddenly, with consumers feeling less confident and banks feeling stingier, the homebuilders are in the worst position (well maybe better than the sub-prime lenders.)

With the sub-prime mortgage fiasco still fresh in investors and bankers’ minds, you probably not see a huge resurgence in high-risk lending. Experts in the mortgage industry say that the sub-prime market will take a long time to come back, in what is essentially a rebuilding of trust between the lender and the borrower.

It is safe to say conditions are good for buying a home right now, since the real estate market should slowly begin to rev-up again. Given five or more years, you are likely to have an increase in property value in most places.

Just remember, don’t buy over-valued properties, and don’t borrow more than you can handle.

E-mail the author at Matthew@tigerweekly.com

Originally Published: Issue 581 - September 26, 2007

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