How Will the Fed’s Most Recent Cuts Affect Buyers and Sellers?

By Desiree French

The Federal Reserve’s most recent slash at the federal funds rate, from 1% to a range of 0% to 0.25%, is the lowest U.S. rate on record. The December 16 rate cut is the latest in a string of efforts to stabilize the economy and help free up credit markets for beleaguered borrowers, including home buyers.

The impact on mortgage rates was immediate. Freddie Mac reported that average rates on 30-year, fixed mortgages dropped to 5.19%, their lowest levels since 1971. Other mortgage rates dipped as well, with many falling below 5%. The declines, which follow a recent move to help the housing market by buying up to $600 billion worth of mortgage-backed securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, continued almost across the board into the Christmas week.

But are the cuts enough to get people into the housing market? Rising unemployment, a volatile stock market and low consumer confidence have tempered outright optimism. With unemployment at 6.7%, economists say the jobless rate could hit 9%-even 10%-before the economy rebounds.

This uncertainty has many potential home buyers sitting on the fence, while others are waiting for home prices to bottom or mortgage rates to dip further.

John Tuccillo, an independent consultant and former chief economist at the National Association of Realtors, believes that the rate cuts will have some positive impact on the housing market.

“How quickly the economy and the housing market will respond is questionable,” he says. “We have a couple more quarters of recession to go through. But I think we will see the economy come back quicker because we’re filling it with massive amount of drugs. It’s being dealt a high dose of antibiotics and the patient needs to respond. It will recover faster now rather than later because of government influence.”

Markets without major problems, he notes, will do well, although the greatest beneficiaries of the rate cut will be homeowners who are up to date on their mortgage payments and have verifiable income, good credit scores and equity in their homes. They will be able to take advantage of lower mortgage interest rates and refinance to save money.

Meanwhile, sellers will need to supplement current low rates with realistic asking prices to attract more buyers to sell their homes.

It is critical for Congress and the new administration to enact a housing stimulus package to boost housing and spark an economic recovery, NAR President Charles McMillan has said. “We need more than low interest rates to encourage enough buyers to enter the market,” he says.

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