Lancaster County PA Realty Check: Fed Comes Through With A Meaningful Cut

Both the stock market and mortgage rates reacted positively to the Federal Reserve's rate cut announcement today.  A federal funds rate reduction of 1/2% was announced after the Federal Reserve Open Markets Committee meeting.  Many pundits had speculated that a rate cut of only 1/4% was more likely, since the Fed is primarily interested in preventing the resurgence of inflation.

However, the softness of the economy in general, and of the housing market in particular, has apparently reduced the Fed's fear of inflation, and increased the probability of a recession if rates were not reduced more than a minimal amount.  Recent polls show that home builders are bearish in all four regions of the United States.

The rate reduction is good news for the millions of homeowners with adjustable rates set to adjust in the next year or two years.  Since subprime mortgages are almost non-existent now, these borrowers would be in trouble except for the fact that the FHA mortgage, with some significant new improvements, is back in style again!

While subprime mortgages priced risk through increased interest rates, FHA prices risk through MIP, its mortgage insurance.  This is a prime reason why FHA still has reasonable interest rates!   Also,  FHA has recently become much more liberal in its appraisal requirements and down payments.  It was already quite liberal in credit requirements (no minimum FICO) and gift policies.

It will now be easier for many homeowners to refi out of their adjustable rates.  This should reduce the number of foreclosures, which in turn will reduce the number of properties on the market.

Fewer homes on the market will reduce the softness in housing prices, and start us back on the road to a more normal housing market.

Copyright2007BrianSchulman©