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The Calm After the Storm: How the Recent Federal Rate Cut Could Help Your Sales
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| November 2007 |
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| The Calm After the Storm: How the Recent Federal Interest Rate Cuts Could Help Your Home Sales |
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When consumer confidence is down, spending is sure to dip too — affecting the building and real estate industries in particular. In the wake of the subprime lending crisis, the Consumer Confidence Index hit a two-year low in August,1 but recent federal interest rate cuts are giving the industry, and your customers, renewed hope.
In response to rising consumer worries and instability in the U.S. financial markets, the Federal Reserve Board reduced the discount rate (designed to improve bank liquidity) to 5.75 percent this past August. In September, the federal funds rate (designed to control consumer liquidity) was dropped to 4.75 percent, along with another discount rate drop to 5.25 percent. Then in late October the federal funds rate was reduced yet again by 0.25 percent to 4.50 percent.
The big question has yet to be answered: Will these rate cuts stimulate economic growth as intended? In the housing market at least, short-term federal rate cuts may not have much effect on current fixed-rate mortgages. That’s because these rates tend to be based on forecasted inflation rather than on federal rates.2
However, experts believe that initial rates on adjustable-rate mortgages may begin to drop. And that can be a boon for builders as home loans could again become more accessible to home buyers.
In addition, the hope is that these lowered federal rates might increase bank lending potential and encourage overall economic stability.3 The cuts should also directly lower consumers' monthly credit card and other payments, potentially giving home shoppers the extra financial confidence to buy. National Association of Realtors (NAR) President Pat V. Combs comments, "Making borrowing more affordable could go a long way in helping turn around the sluggish housing market."4
While the recent federal rate cuts are by no means a comprehensive solution to the current housing market challenges, National Association of Home Builders’ (NAHB) Senior Economist David Seiders is also optimistic, "We now expect to see home sales return to an upward path by early next year and housing start to begin a gradual recovery process by mid-2008."5
Because affordability is usually high on home buyers’ priority lists, it may be the perfect time for builders to use dropping home prices, increased inventory and the availability of more affordable loans to sell homes. And whether or not the rate cuts translate into better lending rates, an air of increased confidence may be all that is needed to jumpstart home sales.
| 1 |
“Consumer Confidence Drops 6.2% to 2 Year Low in Aug.,” GypsumToday.com, Industry News, http://www.gypsumtoday.com/news/viewnews.pl/id=1101,* posted on Aug. 8, 2007, accessed on Sept. 20, 2007. |
| 2 |
“Mortgage rates lower, too? Not so fast,” Holden Lewis, www.bankrate.com/brm/news/mortgages/20070920_rate_cut_affect_mortgages_a1.asp, Bankrate.com,* posted and accessed on Sept. 20, 2007. |
| 3 |
“Feds cut discount rate,” Paul R. La Monica, CNNMoney.com, http://money.cnn.com/2007/08/17/news/economy/fed_rates/index.htm,* posted Aug. 17, 2007, accessed on Aug. 21, 2007. |
| 4 |
“Fed Half-Point Rate Cut to Help Home Buyers,” Realtor® Magazine Online, Daily Real Estate News, www.realtor.org/RMODaily.nsf/pages/News2007091901,* posted on Sept. 19, 2007, accessed on Sept. 21, 2007. |
| 5 |
“Credit Tightening Weighing on Builder Confidence in August,” NAHB.org, http://www.nahb.org/news_details.aspx?newsID=5198,* posted on Aug. 15, 2007, accessed on Aug. 21, 2007. |
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