Whaaat!! How much did you cut?

For those that have been perusing my blog, you know that I am as bearish now as they come. But the extent of this cut is shocking, and the rationale is even more shocking. The reason we are where we are now was too much cheap money for too long. This caused a big bubble (actually, 2 bubbles) to burst. What's the prescription for this ailment? More cheap money, of course. There is nothing like a little over proof rum to make you forget you have a hangover.

Bernanke says that the real estate bust spreading is risking the health of the broader economy. The bust came from a bubble, which came from dropping interest rates. This most recent drop just may exacerbate it. Residential mortgage rates are tied to the 10 year note and commercial mortgage rates are tied to USD LIBOR. Both have decoupled from the Fed Funds rate, as Greenspan has attested.

So, now that you have dropped rates Mr. Fed, what happens when mortgage rates move up anyway? Much of the tightening is already happening because the liquidity in the market from securitization has dried up. No amount of loosening policy will alter that in the medium term.

Addendum: the 10 year T note yield is up, and as a result, the 5 year ARM has increased from last week. The housing market is a mess, not due to interest rates, but due to the fact that sloppy underwriting reigned supreme. People who got houses they can't afford will have to lose them for this to be over, period. Even the CEO of Hovnanian is guilty of taking advantage of sloppy underwriting to buy into the top of a bubble, then trying to borrow his way out of it - and he runs one of the largest homebuilders in the country!!! Mortgage rates can go down and we will still have a housing problem, for too many people got mortgages they simply cannot afford.

'Nuff said.

Comments

[tom stone]

It looks like the fed will now allow 100% financing up to $729k.I know quite a few people who think this,with the rate cut will "save" home prices in california.you betcha.people can now afford 10x plus the median income as a median home price.

[Reggie]

If so, this will cause rampant speculation in the lower price sector, which will fuel those who want to move up for they will take advantage of the 1031 tax exchange rules to trade up instead of paying capital gains tax, which will push the next price level up (you can't trade laterally or down, you must trade up), which will in turn push us past where we are now.

Sooner or later, the real estate oversupply has to pop the natural way. Lowering rates simply levers it further, postpones it, and makes the inevitable even worse.

[newport coast homes for sale]

People who got houses they can't afford will have to lose them for this to be over, period.