Realty Check

Does the Fed Cut Save Housing?


The short answer is: not today. I realize the CNBC audience doesn't need an explanation of why a Fed rate cut doesn't mean that you're suddenly saving hundreds of dollars a month on your 30-year fixed. Yes, it may slightly affect adjustable rate mortgage interest rates, and certainly some home equity lines, but the troubles in the housing market are far too vast right now to respond suddenly to a little ol' rate cut.

Inventories, affordability, buyer confidence -- these factors trump the Fed. Hovnanian's fire sale last weekend (which by the way Mr. Hovnanian himself admitted on "Squawkbox" this morning would likely be prone to the same cancellation rate, about 35%, as the rest of the company's sales) was a wake-up call to the desperation of big builders dealing with big inventories.

The Fed cut could help the ARM adjustments from being quite so drastic, which in turn might stem a few foreclosures, and help general inventories a tad, but the builders still built too much and they know as well as you do that they need to unload it fast before they can start to stop sweating.

Affordability also has a long, long way to go. While I don't like to send you readers elsewhere, there was an excellent article on the front page of The New York Times business section today entitled, "Will the Fed Reverse the Housing Slump?" (registration required) that shows very clearly how affordability jumped completely and quite historically out of whack and remains that way as we speak. Home prices have a long way to go, and the Fed has nothing to do with that, except perhaps to make some buyers bullish again and hamper home prices from coming back to earth where they belong.

And then there's buyer confidence. Okay, that one may get the only boost from the Fed cut, but it's going to be short term when buyers figure out what the rate cut really mean. And then, I wonder if the cut actually helps ARM rates a bit and helps buyer confidence, then do more buyers jump into the ARMS, which is what got us into trouble in the first place?

The short answer would be no, because the mortgage market has tightened so much that even the ARM sales are more conservative and the standards safer. But I still think buyers need to be wary, especially since home prices in the previously hottest markets still need to come down. If you're not in a hot, hot housing market, I'd say have at it!

Unless you want to wait for another cut...

Questions?  Comments?