This blog post on how far the U.S. dollar has fallen and why, reminds me of how much the Federal Reserve must be chomping at the bit to raise interest rates.
A higher interest rate would strengthen the U.S. dollar and lower the price of oil in the United States. Think of what cheaper oil would do for the American economy!
But, alas, the Fed is trapped. The U.S. housing bust seriously undercut the integrity of the U.S. banking system and that’s where the Fed has to focus it’s attention by keeping interest rates low… for now.
As soon as the housing market and the mortgage banking market look a little less precarious (and certainly sometime after the presidential election is over), I’m sure the Federal Reserve will be under strong pressure to raise rates.
The next 6 to 9 months may end up being the sweet spot of the current housing cycle with both low prices and low interest rates.
UPDATE: Linked by Jonathan Dalton. Thanks.
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Fidelis Kani 06.10.08 at 2:26 pm
Yeah, prices will remain the same or even go up once the interest rates increase!
Check out the 30 yr mortgage rates:
Now = 6.12
Last month = 5.69
The fed does not even control these things.
krogers 06.10.08 at 3:56 pm
I was under the impression that the interest rates are still high because the lenders don’t want to get into a long term loan with a short term interest rate drop.
This is why even though the Fed has been dropping the rate, lenders have not really passed any of the savings on to the average loan and rates have stayed relatively the same.
As far as I knew, rates were based more on unemployment speculation and the 10 yr treasury note.
Given this, do you think lenders will really increase their rates with the economy still doing so poorly?
John Wake - Real Estate 06.10.08 at 4:26 pm
“… do you think lenders will really increase their rates with the economy still doing so poorly?”
I think the Fed was “forced” to cut the rates because of the house/banking crisis. The spread, the amount banks make on the mortgage, is high now. Which helps the lenders a little bit. And many need all the help they can get.
The Fed has to wonder, what is better for the economy, a higher interest rate that strengthens the dollar and lowers U.S. gas prices, or a lower interest rate. I don’t think the answer is clear cut. Thus the dilemma for the Fed.
Cbass 06.10.08 at 4:38 pm
I thought that rising interest rates were bad for home values?
Also I think the $4 gallon gasoline is really gonna crimp the US consumer and Benny Boy is going to have to start raising rates. Certainly he is done lowering though so people who need to refi should do it now if they can.
JM.02$
krogers 06.10.08 at 4:47 pm
I see, good thoughts on that. Obviously that sweet spot is something I’m really trying to keep my eye on.
I can see how that spread would help the banks, but since the discrepancy is much larger now between the rate they loan out at and the current Fed rate, how they can maintain that large gap or will they?
If the Fed starts moving the rate back up, and banks try and adjust to keep that spread, they’ll have loans that are too high for consumers to afford, given that unemployment rates are continuing to climb and cost of living is going up with increasing gas prices and a lower US dollar.
With them getting more from a loan, but less people taking them, do you think lenders would still increase rates?
I’ve been trying to play the housing game but a lot of this is starting my head spinning when I add more pieces to the puzzle, always appreciate the advice John!
krogers 06.10.08 at 4:56 pm
@cbass
That’s what I’ve always heard as well, usually because interest rates can make such a huge difference on your mortgage payment.
Since less people can afford more house at a higher rate, housing prices have to go down in order to afford them.
Russ 06.12.08 at 8:43 am
“And many need all the help they can get.”
No, those banks need to fail and more responsible parties will fill the void. Some chaos? Yes, but it will be better in the long run if lenders know that gambling losses on any bubble will not be mitigated by the central bank or the federal government.
Cbass 06.12.08 at 8:58 am
Looks like Benny has decided it is time to fight inflation and bring oil back to Earth. So I guess we are going to see if higher interest rates are good for home values over the next 1-2 years.
money.cnn.com/2008/06/12/news/newsmakers/bernanke.inflation.fortune/index.htm?postversion=2008061208
John Wake - Real Estate 06.12.08 at 10:20 am
Cbass, Nice article. Probably not good news for Arizona home sellers, Realtors, mortgage lenders and title companies, or Canadian buyers of Arizona homes.
Let’s see how it plays out.