Fed Chair Benanke grabbed his scalpel and trimmed 3/4 of a point of the Fed Funds Rate. It was termed an emergency cut due to recent world events, i.e. the general stock market meltdowns in Europe and Asia.
Dan Green, a fellow contributor over at BloodhoundBlog, was kind enough to jot down a quick tutorial showing the relationship between Fed Rates and Mortgage Rates.
Bottom line?
It’s what many including a certain smooth pated individual has been saying all last year. There’s not enough real inflation to matter. It’s reflected in mortgage rates, which can’t lie. This is why it makes so much sense for Bernanke to keep flooding the banking system with liquidity — as he has been doing big time.
When there’s little or no inflation, mortgage rates stay low or keep falling. Though the talking heads with a Bear-like agenda keep wringing their hands about their (and I love the way they couch this next thought) ‘inflation concerns’ — inflation hasn’t shown up. Much like many of the same gabbing faces who’ve predicted 13 out of the last 5 recessions, they must think repetition will make it so.
My good friend Brian Brady recently locked a borrower into a 30 year fixed rate loan of 5.375%! If you’re thinking about refinancing your home, giving Brian a call would be a solid first step.
Let’s review — and you folks out there who still think we’re all goin’ to hell in a hand basket? I’m not totally discounting that slim possibility. I’m not in any way afraid of a recession if it indeed becomes reality. Why? Because it will, more likely than not, provide great cover for my clients while buying more and more real estate.
OK, the review. Billions and billions have been pumped into the domestic and world banking systems. We’ve already seen the positive results. Now this rate cut, which by the way, isn’t the first by any stretch recently. What the heck do you expect to happen with significantly more capital available to lend at ever decreasing costs? (interest rates) Ah, Duh. Gee, I dunno, maybe more business activity? Ya think?
Don’t think for a nano second Bernanke’s doing this primarily to help Wall Street. His attitude with those guys is to allow them whenever possible to rise or fall by the consequences of their own actions. They’ll benefit from his rate cut today. But don’t think it was the driving force behind this cut, cuz it wasn’t. He’s now looking at adding more wood to the fire fueling the locomotive that is our economy. The big picture requires Bernanke to help avoid the stock market from a severe drop.
Now all we need is for Bush and congress to quickly give us some much needed tax relief, and you’ll soon see what’s possible.
Watch the bond rates, especially the 10 year.
Keep abreast of mortgage rates. Inflation will tend to drive them up. It ain’t happenin’.
Inflation is not imminent in my opinion, based upon the three other cycles I’ve been through. The facts just don’t support that scenario, as they did almost 30 years ago. The Bears want us to pretend all the bad times they predict are in our best interest. A huge drop in the market will accomplish one thing — protect all the Bears’ short positions. Don’t buy their whining. Be kind though, and offer them some cheese.
No related posts.
About BawldGuy
Jeff,
I am not sure what world you live in, but inflation is alive and well in my world. Lets check a couple of stats: Price of oil-almost doubled since last year, not sure what we make with oil, let me think, oh just about everything from plastics to gasoline. As a Californian I have to think you feel it at the pump.
Price of Gold, the inflation hedge, almost double since last year, also interesting. You would be crazy to think inflation is not here already and soon to be getting even worse. I am neither bear nor bull, but come on. Anyone who looks a few inches below the surface can see that inflation is here and should be a worry.
Bernanke doesnt care about Wall Street?! If you can say that after today, then there is obviously no convincing you otherwise. Its obvious wall street got us into this mess, heck, I am apart of that process. It is also even more painfully obvious that aggressive fed rate cuts serve wall street. Not to serve wall street would be to maintain rates or slightly cut rates to keep businesses investing, allow the appropriate recession and move forward. You know, basic economics…
Your money supply argument doesnt hold weight here because that is not the problem here. Throwing more money at grossly overpriced assets leads to an unjustified rise in prices, some people call that “inflation,” not sure what we should be calling that here in bawldguy land. I respect the heck out of your investing opinions, but I have to strongly disagree with your reading of this situation.
Michael — we both know how our worlds are different.
You’re coming up with commodity prices which indeed have risen. They have nothing at all to do with core inflation, which is caused by too much money pumped into the economy. This hasn’t happened.
Throwing more money at overpriced assets? When buying real estate at some pretty steep decreases, I’ve not noticed an increase in prices. The inventories will have to clear out before that happens. We’re not there yet — not by a long shot.
My money supply argument is Bernanke’s argument, so if you disagree with me, you disagree with Bernanke too. So be it.
I didn’t say Bernanke doesn’t care about WS, I said they weren’t his primary concern. Once he perceived their financial health jeopardizing the economy to today’s extent, he made his move. Much of WS has been calling Bernanke an idiot from Day 1.
You’re in their corner, which is a legitimate school of thought.
We’ll see. MY money in real life is on Ben.
His world is not your world either.
Jeff – well said. I’m so tired of WS dudes justifying their take at the expense of RE. Is it that they can never guarantee, with absolute certainty, gain on their investment opinions?
Jealousy I say…. Suspect jealousy
.
Hey Mike – how’s this for a chart.
What people paid for real estate in 1960 will never be realized again despite market fluctuations. Likewise with 1970, 1980, 1990, 2000 and soon enough 2008.
How’s that for a guarantee! 
I’m not so sure about the inflation argument, Michael. Inflation, certainly, IS a problem, however, core inflation is well under control.
Cost-push inflation is oft blamed for the 1970s debacle but marginal tax rates were an underlying problem. Oil and food are highly volatile components of the CPI and are inter-related (transportation costs are a major part of retail food costs).
The only solution to cost-push inflation is political; someone has to stand up to OPEC. Now, while that sounds hawkish, we Reagan Revolutionaries know that OPEC needs a healthy USA. If the US enters a recession, OPEC countries will feel it and there will be fewer “island developments”.
The Fed must focus on what it can control; oil and food are not components of their model.
Gold? eh! I don’t know about that. Other than a factor of production, it’s importance as an inflation hedge has diminished.
Did Ben appease Wall Street today? You betchya he did. As Wall Street goes, so does the nation’s economy. That’s why they call it a leading indicator.
Iffen that’s your idea of a scalpel I’m not looking forward to what you use as a hatchet.
Where isn’t there inflation? That’s probably easier than the reverse. You don’t think home prices are inflation? Care then to try to attract talent to our areas by paying merely non-inflationary wages? And remember taxes are inflation. You just said we need tax relief, There are two kinds. There’s the kind being proposed in D.C. and Sacramento which is inflationary; give everyone a check for a million dollars. Don’t you agree that giving everyone a check for a million dollars would be inflationary? Good, that means you agree giving everyone $800 dollars is inflationary.
BB cut rates to make banks profitable with larger margins. That means retail rates are not going to come down enough and let’s face it the idea is to give people in loans they cannot afford loans that would cost less. Care to do the math on what interest rates would need to be to bring housing in line with either prevailing rents or wages? We respectfully disagree. This was all about helping Wall Street because while BB is powerless to affect housing prices he can do this to cushion the blow to a few other sectors of the economy.
Robert — as always, you make me smile — thanks.
>Iffen that’s your idea of a scalpel I’m not looking forward to what you use as a hatchet.
I could’ve used either one to make my point. I chose a scalpel.
I didn’t say this wouldn’t help WS, I said the opposite. What I did say is that BB focuses on a bigger picture than just WS.
There sure are a bunch of folks with more and better info than Bernanke is apparently accessing.
Brian and I tend to say the same things. He tends to say them better.
Sam — You need to come outa yer shell a bit.
Michael is a very smart guy. Unlike most ‘smart’ people he’s leveraged his innate intelligence with an MBA from one of those high fallutin’ east coast universities. He’s arrived at his current station in life through a combo of hard work and more hard work.
I can say with a pretty high level of confidence, that he ain’t jealous. He’s often convinced his view is the only view, but than so are many of us.
My view, no matter the subject, is to be ruthlessly objective, acknowledging the plausibility of what others disagreeing with me put forth.
This current dustup won’t take more than 6-12 months to play out — in my opinion.
And you’re in San Diego — very cool. Lunch sometime soon?
My pleasure. Office is also in M.V. 3111 Camino Del Rio
I’ll catch up later this week.
BawldGuy for President! Na, probably a pay cut isn’t?
it!
Until about a year ago we were at 3131.
President BawldGuy? Not even in a parallel universe.
I always find it interesting to talk about core inflation. Do i not still have to buy gas and food? I know we are far from the 70s, but lets not go crazy. Recessions are a normal free market phenomenon. Real estate needs and is certainly having one. Obviously real estate is local, but on a national level everyone, sans the bawldguy, feels prices are out of line with wages and rents. Artifically propping things up only makes things worse.
I am not against BB, but i would rather have a free economy. Were this not an election year, he might also.
Michael — we were talking about what Bernanke might control, not about what we need to buy.
I’m with you on both the need for cleansing recessions and as you, prefer a much freer market.
Real estate prices on the national level? Again, as you do, I strip projects down to the naked truth then make my call. There seems to be no dearth of either tenants or jobs in much of the south and west.
Today while doing some cardio at the gym, I saw Rich Dad, Poor Dad himself on TV saying in plain English — keep buying real estate, including now. He certainly isn’t my favorite real estate investment author, but he’ll do in a pinch.
Hey, I got my start from reading Rich Dad, Poor Dad and I will give the author credit for calling to buy gold at least a year ago. As someone mentioned above though, me and my other “WS dudes” (I like the sound of that, like we are a mob or something)see some fundamental problems with real estate today.
Problem 1.
Where is the money? With the repricing of risk at many, probably all, banks the fly by night investors are washed up. Even the hard money lenders need to deploy capital more studiously. Without investors, there is a huge glut of inventory on the market.
Problem 2.
Homebuilders need cash. The only way they get cash is by slicing their real estate prices. Much like any prisoner’s dilemma this will/has resulted in decling prices.
Problem 3.
Consumers dont feel good about the economy. This results in the delay of major purchases. While a house may not be a major purchase to me, for 95% of Americans it certainly is. Faced with the prospect of realizing a 10% or far greater loss in the value of their home people will sit tight.
Problem 4.
Prices have out stripped wage growth. I will agree with you employment is not great, but its not terrible (yet). However, without real wage growth consumer simply cannot afford housing prices as they currently stand.
I am a buy low, sell high guy like most investors. The only question is whether or not this is the right low to buy at. Silly question since I am closing on a condo tomorrow, but you better believe I will be ready, willing and able to buy a lot more in a year when values have reacted more favorably. Personally, I say what is the rush. Aside from a very few areas, I doubt real estate prices across the board see tremendous gains. I expect more supply and fewer buyers for at least a year.
Sorry one last note. I read an interesting article on why apartment REITs have been getting crushed, when it would seem the poor housing market would be good for tenancy. It turns out many investors, who cannot sell their properties are turning to becoming landlords and flooding the market with rental space. I suppose I could have seen that coming, but my question is how long will that last. People who are not accustom to being landlords typically dont like the food once they start eating it, if you know what I mean. In the short term, however, this has been keeping rents stable.
Michael — again we’re, for the most part, in agreement. I especially appreciate the ‘closing on a condo tomorrow’ part.
I’m having no problem getting loans for my clients. And the rates have been pretty enticing of late too, as you’re well aware. We’ll take advantage of that as long as it lasts.
The ‘glut’ of builder inventory is steadily and predictably disappearing, as the prices are too good to pass up. Who’s buying them? Those for whom predicting the exact bottom is just the punch line to the latest real estate joke.
The homeowners are indeed renting out their homes. Who do you think is gonna lead the parade of closed escrows as soon as they get the chance?
Again, I’ve seen this movie before. As Trump said, (and I’m no fan) ‘it’ll come back, it always does.’ Whether you’re right on time, hitting the bottom perfectly or miss it by over a year, it doesn’t matter enough to care.
The fence sitters will be paying significantly more than those who didn’t try to time the bottom.
Long term, rents will shoot up big time. Less can buy a home. Few apartments have been built. Supply & Demand. Buy now and reap the benefits.
Spoken like a true realtor, I must say. Dont worry, I have bookmarked your 2008 predictions and will gladly buy you a beer if I am wrong.