Feds discount rate cut has hurt home buyers - How you ask?
Idaho Real Estate buyers have been confused because every time they call me about buying Idaho Real Estate in Idaho I have to tell them that mortage rates have risen. They could not understand why mortgage rates were increasing when they heard on the news that the Federal Reserve Board has been aggressively lowering the discount rate which has been on the news for months.
The discount rate is the rate member banks may borrow short term funds from the Federal Reserve Board. In other words, the Federal Reserve offers these funds to member banks in an attempt to stimulate the economy. It is designed to encourage member banks to offer consumer products and services at more competetive rates to encourage consumers to spend money. Banks can lower rates on credit cards and other consumer type loans when they can borrow money at lower rates.
The downside to this is that lower rates passed on to consumers can fuel spending and therefore inflation fears if it works like it is designed to. When consumer spending rises fueling inflation, mortgage rates rise which is exactly what has happened these past few months.
When the economy is robust and inflation is a concern mortage rates will rise in an attempt to curb inflation. When the ecomony is sluggish as it has been the past few months bonds (which affect mortgage rates) will rise and mortgage rates will fall in an attempt to encourage economic growth.
So you ask, why have mortgage rates not dropped since the economy has been sluggish? The reason being is that the Federal Reserve Board has been on an aggressive patern of lowering the discount rate which economists believed would help the economy and fuel inflation which just has not happened. The economy remains sluggish in spite of the efforts of the Federal Reserve Board.
It appears now that the Federal Reserve Board is close to ending it's aggressive posture of lowering the discount rate mortage rates will finally start coming down, especially if the economy remains sluggish. I have said now for months that that 30 year mortgages must reach 5% or below to make a real positive difference and deal with the glut of homes in most parts of the country.
Today, the 6th day of May, 2008 Bank Rate quoted 5.78% on 30 year mortgages compared to a quote of 5.87% a week ago. If mortage rates continue to fall and fall below the magical 5% rate I have mentioned I clearly expect the housing market to be revived in many parts of the country. Combine low housing prices caused by record short sales and foreclosures with incredible sub 5% mortgage rates and this national housing market could rebound.
If you see mortage rates continue to fall don't wait. Go to Idaho Real Estate Search to start your home search and find the the perfect home for you and your family.