RISMEDIA, March 26, 2008-(MCT)-The Federal Reserve cut interest rates by three-quarters of a point last week to combat the credit crunch. Wall Street rallied immediately after the rate cut, and the Dow Jones Industrial Average ended the week at 12,361.32, 3.5% higher than the previous week’s close.
OK, so when will the credit crunch end?
Sorry to say, not today. Not next week. And maybe not even by this summer. Like it or not, we’re stuck for now living in a world of low rates-and high uncertainty. Yes, it stinks.
While consumers will see lower rates on credit cards, car loans and some other consumer loans _ and yes, savings accounts and certificates of deposit, too-it’s essential to realize that banks aren’t exactly going to make mortgages cheap and easy. Traders aren’t loading up on mortgage-backed securities, not after getting burned by lax lending in the past, not after last weekend’s fiasco at Bear Stearns Cos.
The average 30-year mortgage rate was actually higher March 13 than it was a year ago. The average 30-year rate was 6.39% March-up from a year ago when the average was 6.16%, according to a survey by Bankrate.com.
“The credit crunch is having a much bigger impact on 30-year mortgages than anything the Fed is doing with interest rates,” said Greg McBride, senior financial analyst at Bankrate.com.
The Fed now has lowered short-term rates six times within six months. The federal funds rate-the rate banks charge each other for overnight loans-dropped to 2.25% from 3% on Tuesday. After Tuesday’s cut, we saw banks lower the prime rate to 5.25%.
Again, though, will cheap credit and some bargain prices make more people want to go out and buy a big-ticket item, like a house?
Alex Aloe, associate broker for Remerica Liberty Realtors in Livonia, Mich., sure hopes that the new lower rates will snag serious buyers-and that mortgage rates trend down in the months ahead.
“I’ve been through three recessions in 32 years. This is the worst ever,” said Aloe, who said his business was down about 25% last year, thanks to the high level of foreclosures and falling home prices.
Aloe is somewhat hopeful after seeing more interested home buyers in the past two to three weeks-people who weren’t just fishing to find out a home’s price but actually wanting to go into the house to look around. He sold a home for $490,000 in the past week in Commerce Township. The original asking price was $550,000.
Even so, Aloe remains cautious and concerned that banks will continue to be reluctant to lend.
Other experts agree that credit will remain tight.
Eugenio J. Aleman, senior economist for Wells Fargo in Minneapolis, said he doubts that lower rates will help consumers and some businesses very much because it is far more difficult to get a loan now than it was a few years ago.
“There’s a credit crisis. There’s a tightening of credit standards and lending standards. You have to have excellent credit to get a loan today,” Aleman said.
Most consumers can’t just ignore the reasons the Fed started aggressively cutting rates in the first place.
“Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,” according to the Fed’s statement Tuesday.
Trip Bosart, managing director for Wachovia Securities in Birmingham, Mich., said he would expect that the Federal Reserve wouldn’t have much more room to cut rates once the federal funds rate hit 2%.
To be sure, the Fed had cut the federal funds rate to as low as 1% back in June 2003 in the wake of last U.S. recession, 9/11 and the collapse of the tech stock bubble. And the Fed left rates at that 1% low point for an entire year-only gradually beginning to raise rates in June 2004.
But Bosart and others now say those ultra-low interest rates turned out to be a mistake and led to today’s overheated housing market and troubles in the credit markets. Some say the Fed isn’t likely to drop rates that low anytime soon.
“Look what it cost us,” Bosart said. “I think it created the bubble.”
© 2008, Detroit Free Press.
Distributed by McClatchy-Tribune Information Services.
