The Federal Reserve has been on a tear lately with interest rates. Could we be in for some of the same unintended consequences stemming from the aftermath of the 2001 stock bubble and the September 11th terrorist attacks? With the economy possibly heading into a recession, the Fed has been following some similar steps by cutting Fed funds rates in order to help revive the economy - partly by making home buying financially enticing. Will the same behavioral patterns emerge? There are, no doubt, significant market variations, but let's replay the key factors.
The Fed started cutting rates from 2001 and the mortgage rate fell by 2.5 percentage points by summer of 2003. ARMS fell from 7% to 3.5%. Housing demand rose, home prices accelerated, and inventory fell. Global capital providers were eager to provide financing, ratings agencies gave their blessing on subprime products, and no documentation loans proliferated. Then, from 2004, the Fed began to tighten and rates escalated. Buyers started to back away, flippers quit, inventory rose, and home prices began their decline. Fast forward to mid-2007. A lack of market liquidity and foreclosures forced the Fed to cut rates. Can it happen again? Probably not. Global lenders have been burned and are not going to make the same mistakes. Now it will take a lot more than a heartbeat to get a loan. Borrowing rules are more rigid. The good news is that buyers with income and money for downpayments will be able to get good deals on houses. Though, watch out for rising rates. What's your opinion?
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