As housing crisis persists, expect further trims in '08
December 12, 2007
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
The For Sale signs and foreclosures won't disappear overnight, or even next year, but the Fed's third interest rate cut for 2007 -- a quarter percentage point on a key rate -- will give some families a better shot at holding onto their homes.
The Fed's rounds of rate cuts mean: Adjustable-rate mortgages won't reset and soar as high as they would have otherwise. Home equity lines of credit are getting a tad more affordable. The average 30-year mortgage rate hit 6% last week -- the lowest point in more than two years, reports Bankrate.com.
Oh, yes, we're still treading through a toxic dump of bad debt. The threat of a recession continues to be higher than usual. Home values will continue to fall.
On Tuesday, the Dow fell by 294.26 points and closed at 13,432.77 because investors had hoped for a deeper cut.
But the Fed's actions -- on top of a strategy to freeze interest rates for some home borrowers with bad credit and adjustable-rate mortgages -- will do some good.
"It is helping to minimize the collateral damage," said Diane Swonk, chief economist for Mesirow Financial in Chicago.
The Federal Reserve cut short-term rates to 4.25%, down from 4.5%. It was the third rate cut since Sept. 18. Banks responded and lowered the prime rate to 7.25%. The prime rate influences certain credit cards, home equity lines of credit and other loans.
Economists say that one, two or even three more rate cuts could be ahead in 2008 as the Fed tries to patch the crumbling foundations in the U.S. housing market.
So far, many market watchers have been shocked by how long, how deep and how ugly the credit crunch has become. The subprime mortgage shakeout slapped investors hard in August, but things seemed to simmer down early in the fall. Then, tighter credit in response to subprime defaults whacked investors again in late October and November.
The worst, it would seem, is not over.
"People lost confidence for a second time and that's very unusual," said Dana Johnson, chief economist for Comerica Inc.
Johnson puts the chances of a recession next year at 45%.
Will the Fed's cheap money help?
Yes, for now.
"Most importantly, it will help settle very unsettled financial markets," said Mark Zandi, chief economist for Moody's Economy.com.
Although stocks fell Tuesday, the Dow Jones Industrial Average had gained about 980 points between late November and Monday as investors anticipated more rate cuts. The Dow had closed as low as 12,743.44, on Nov. 26.
Why did Wall Street wimp out Tuesday?
"Investors are spoiled," said Sam Stovall, chief investment strategist for Standard & Poor's equity research services in New York.
Stovall said many on Wall Street had expected that the Fed would cut rates by half a percentage point.
Auto stocks also fell Tuesday. General Motors Corp. closed at $27.51 a share, down $1.49 a share, or 5.14%. Ford Motor Co. closed at $6.97 a share, down 17 cents, or 2.38%.
Yet the Fed's continued action will bring relief to consumers who are borrowing to buy cars or homes or worrying about higher payments on adjustable-rate mortgages.
Roughly 2 million homeowners by some estimates will see their adjustable-rate mortgages shoot up during the next two years.
Higher rates -- coupled with declining home values in many markets, including Michigan -- mean that the foreclosures would keep on coming.
Lower rates could give homeowners more breathing room.
Let's consider a homeowner with a $200,000 loan balance outstanding on an adjustable-rate mortgage with 27 years remaining.
Three years ago, the initial loan of $211,000 at 4.5% would have carried a monthly payment of $1,069.
Without any Fed action, that homeowner could have been looking at dishing out an extra $372 a month once the mortgage reset at 7.5%, the rate in place earlier this summer before the Fed cuts, according to Greg McBride, senior analyst for Bankrate.com.
Now, after the Fed began cutting rates, the mortgage rate would go up -- but only to about 5.75%.
The dollar difference?
At 5.75% with a remaining balance of $200,000, the monthly payment would be $1,217 -- an increase of $148.
"Borrowers will feel less pain," McBride said.
Even so, that doesn't mean troubled times are coming to an end.
"It's not going to stop the decline of home prices in its tracks," said Bob Walters, chief economist for Quicken Loans and Rock Financial in Livonia.
Walters expects the housing market to be challenged until 2009. He said the Federal Reserve could ultimately need to cut the federal funds rate -- the rate banks charge each other on overnight loans -- to 3.5% or 3.75%.
To be sure, some doom-and-gloomers on Wall Street now worry that the Fed won't cut rates again. But others disagree.
"Our feeling is the Fed will cut rates at the end of January," Stovall said, adding that Standard & Poor's is forecasting that the federal funds rate could hit 3.5% by the second quarter of 2008.
No one is expecting the Fed to drop rates to the ultra-low level of 1% -- where short-term rates were in June 2004 before the Fed began raising rates.
Some even say that the Fed's efforts to keep rates around 1% for so long contributed in part to today's mortgage meltdown. Borrowers jumped at the chance to buy more lavish living rooms than they could afford.
"It's like a deal that you can't pass up. It's like the Mafia that's printing money for you," said David Littmann, senior economist for the Mackinac Center for Public Policy.
Littmann warns that the Fed's latest rate cuts will fuel inflation ahead.
"They're responding to short-term politics rather than long-term economics," Littmann said.
The mortgage mess has to get cleaned up one way or another. Given that it's bad politically to throw homeowners on the street, I'd bet that rate cutting will continue.
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
The For Sale signs and foreclosures won't disappear overnight, or even next year, but the Fed's third interest rate cut for 2007 -- a quarter percentage point on a key rate -- will give some families a better shot at holding onto their homes.
The Fed's rounds of rate cuts mean: Adjustable-rate mortgages won't reset and soar as high as they would have otherwise. Home equity lines of credit are getting a tad more affordable. The average 30-year mortgage rate hit 6% last week -- the lowest point in more than two years, reports Bankrate.com.
Oh, yes, we're still treading through a toxic dump of bad debt. The threat of a recession continues to be higher than usual. Home values will continue to fall.
On Tuesday, the Dow fell by 294.26 points and closed at 13,432.77 because investors had hoped for a deeper cut.
But the Fed's actions -- on top of a strategy to freeze interest rates for some home borrowers with bad credit and adjustable-rate mortgages -- will do some good.
"It is helping to minimize the collateral damage," said Diane Swonk, chief economist for Mesirow Financial in Chicago.
The Federal Reserve cut short-term rates to 4.25%, down from 4.5%. It was the third rate cut since Sept. 18. Banks responded and lowered the prime rate to 7.25%. The prime rate influences certain credit cards, home equity lines of credit and other loans.
Economists say that one, two or even three more rate cuts could be ahead in 2008 as the Fed tries to patch the crumbling foundations in the U.S. housing market.
So far, many market watchers have been shocked by how long, how deep and how ugly the credit crunch has become. The subprime mortgage shakeout slapped investors hard in August, but things seemed to simmer down early in the fall. Then, tighter credit in response to subprime defaults whacked investors again in late October and November.
The worst, it would seem, is not over.
"People lost confidence for a second time and that's very unusual," said Dana Johnson, chief economist for Comerica Inc.
Johnson puts the chances of a recession next year at 45%.
Will the Fed's cheap money help?
Yes, for now.
"Most importantly, it will help settle very unsettled financial markets," said Mark Zandi, chief economist for Moody's Economy.com.
Although stocks fell Tuesday, the Dow Jones Industrial Average had gained about 980 points between late November and Monday as investors anticipated more rate cuts. The Dow had closed as low as 12,743.44, on Nov. 26.
Why did Wall Street wimp out Tuesday?
"Investors are spoiled," said Sam Stovall, chief investment strategist for Standard & Poor's equity research services in New York.
Stovall said many on Wall Street had expected that the Fed would cut rates by half a percentage point.
Auto stocks also fell Tuesday. General Motors Corp. closed at $27.51 a share, down $1.49 a share, or 5.14%. Ford Motor Co. closed at $6.97 a share, down 17 cents, or 2.38%.
Yet the Fed's continued action will bring relief to consumers who are borrowing to buy cars or homes or worrying about higher payments on adjustable-rate mortgages.
Roughly 2 million homeowners by some estimates will see their adjustable-rate mortgages shoot up during the next two years.
Higher rates -- coupled with declining home values in many markets, including Michigan -- mean that the foreclosures would keep on coming.
Lower rates could give homeowners more breathing room.
Let's consider a homeowner with a $200,000 loan balance outstanding on an adjustable-rate mortgage with 27 years remaining.
Three years ago, the initial loan of $211,000 at 4.5% would have carried a monthly payment of $1,069.
Without any Fed action, that homeowner could have been looking at dishing out an extra $372 a month once the mortgage reset at 7.5%, the rate in place earlier this summer before the Fed cuts, according to Greg McBride, senior analyst for Bankrate.com.
Now, after the Fed began cutting rates, the mortgage rate would go up -- but only to about 5.75%.
The dollar difference?
At 5.75% with a remaining balance of $200,000, the monthly payment would be $1,217 -- an increase of $148.
"Borrowers will feel less pain," McBride said.
Even so, that doesn't mean troubled times are coming to an end.
"It's not going to stop the decline of home prices in its tracks," said Bob Walters, chief economist for Quicken Loans and Rock Financial in Livonia.
Walters expects the housing market to be challenged until 2009. He said the Federal Reserve could ultimately need to cut the federal funds rate -- the rate banks charge each other on overnight loans -- to 3.5% or 3.75%.
To be sure, some doom-and-gloomers on Wall Street now worry that the Fed won't cut rates again. But others disagree.
"Our feeling is the Fed will cut rates at the end of January," Stovall said, adding that Standard & Poor's is forecasting that the federal funds rate could hit 3.5% by the second quarter of 2008.
No one is expecting the Fed to drop rates to the ultra-low level of 1% -- where short-term rates were in June 2004 before the Fed began raising rates.
Some even say that the Fed's efforts to keep rates around 1% for so long contributed in part to today's mortgage meltdown. Borrowers jumped at the chance to buy more lavish living rooms than they could afford.
"It's like a deal that you can't pass up. It's like the Mafia that's printing money for you," said David Littmann, senior economist for the Mackinac Center for Public Policy.
Littmann warns that the Fed's latest rate cuts will fuel inflation ahead.
"They're responding to short-term politics rather than long-term economics," Littmann said.
The mortgage mess has to get cleaned up one way or another. Given that it's bad politically to throw homeowners on the street, I'd bet that rate cutting will continue.
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