1650 E. River Road
Fed Rate Cut
The Fed cut the federal funds rate by another .25% today after a .5% drop in September. What this means is that the Fed is trying to make a significant difference in interest rates to try to stop the slide in the housing markets across the nation. The Fed rate is the basic rate that the Federal Reserve charges for lending money to banks that in turn lend to the public. When the Fed drops its rates, banks almost always respond with a rate drop of their own to stay competitive with the other banks such as Bank of America, Wells Fargo, and Key Corp, which dropped the interest rates of most of their products including credit cards, mortgages and home equity lines of credit.
As interest rates continue to drop, buyers are able to buy more home or save money on the monthly payments. Homes for sale thus become much more affordable, even with the smallest reduction in rates. Also on the other side of the coin, sellers who may be feeling squeezed by adjusting ARM’s will have to come up with less money for the payment because many ARM’s (Adjustable Rate Mortgages) are directly priced off of the Fed rate. Since all housing is more about the actual affordability of the monthly payments than the actual cost of the home, this Fed rate cut will help things slightly in the housing markets across the country. The Fed also made a statement that this cut was intended to be the last of the year and in the Fed’s next meeting (the Fed meets monthly to determine rate increases or decreases) in December, they would be leaving rates unchanged unless the economy takes a major downturn.
In Tucson, as I have mentioned in my monthly statistics and market recap, I feel the market is still headed down over the very short term but may start to make the turn to a more stable market in the next 12 months or so. Where the bottom is, no one knows. But when a buyer can get a 30-year fixed rate mortgage for 5.75% or better, and home prices in the Tucson area have dropped 15%-25% from the highs of 2005, Tucson’s affordability factor starts to be a strong motivating factor for more buyers to come out and make a purchase. One more thing to consider is that as the American dollar keeps falling against the other currencies, buyers from Europe, Canada, and other nations can purchase property in America for much less than ever before. This motivates many of them (especially Canadians, in my experience) to buy winter homes in Tucson. They can now afford even more than ever as their currency trades at (currently) equal to greater than the dollar.