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“Bernanke Cuts Rate…But Mortgage Rates Rise??”
By Sherman Ragland | September 19, 2007
As expected, the US Federal Reserve (Central) Bank cut interest rates that it charges to banks. What was not expected was:
a) The size of the cut, and
b) The rise in long-term interest rates, forcing mortgage rates up.
There had been speculation for several weeks now that the Federal Reserve would cut interest rates by .25 to .50 percent. While a cut this small may not seem like a great deal to many, when you are borrowing (and lending) billions of dollars, like the country’s largest banks do, a difference of .25 percent between what money costs you and what you can earn is signfiicant. The fact that the US Federal Reserve would choose to cut rates by double what was expected has sent signals to the marketplace that the Subprime Meltdown has spread into the larger economy and threatens to bring the US into a RECESSION. Fearing this, the Federal Reserve decided to make a bolder move, then simply cutting interest rates by only .25 percent.
Unfortunately, for home builders, and home buyers, the bolder move on the part of the Federal Reserve as an indicator that a recession is close, caused longer term US Treasury rates to rise. Some economists are saying this is because of RECESSION Fears, and some say it is because huge amounts of money that was in the stock market temporarily flowed into US Treasuries (“Flight to Quality”) and is now flowing back into the stock market. See chart below:
When (Stock market) investors get scared, they tend to park their money in places that are perceived as having less risk. This phenomenon is called “Flight to Quality”, and the place that is usually considered the best “Safe Haven” is US Treasury bills and Treasury Bonds. When lots of money flows into Bonds, the YIELD actually goes DOWN. So when investors get spooked and run to Treasuries, the interest rate that Treasury Bonds pay goes down. Which also typically means that any thing that is “Tied to Treasuries” also goes down. Like Mortgage rates on adjustable loans and 30 year mortgages, and when Yields go UP so do the Interest Rates on things like Mortgages.
Bottom line: The Stock market is rejoycing over the interest rate cut by the Federal Reserve Bank, and (stock) investors are coming out of Treasuries (The sideline) and jumping back into the market (the game). However, if the Federal Reserve is correct, that the reason to cut the rate by .50 percent is because the RECESSION is around the corner, then the party is going to be shortlived.
There is even more reason to believe that the housing crisis is only going to get worse over the next few months and that the conversation is now going to turn towards a COMPLETE FEDERAL BAIL OUT of Homeowners going into Default, as Mortgage rates go even higher over the next few days and months.
This increasing Market TURMOIL, however, is going to create even greater opportunities for The Real Investor. The Investor who understands and practices Creative Real Estate Strategies to also assist the MASSIVE NUMBERS of homeowners in distress, and the increasing numbers of people who are not going to qualify for home loans in the future.
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Tags: bernanke, federal bailout, interest rates, lots of money, mortgage rates, recession, sherman ragland, spooked, stock market investors, treasury bonds, us economy, us federal reserve, us treasury bills
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