Why Major Change in Fed's Interest Rate Policy Would Be Worrisome
Finance Professor Jeff Rosensweig, who teaches at Emory's Goizueta Business School and is a former Federal Reserve senior economist, said when the Fed currently wants to target interest rates, it uses the federal funds rate, which is the overnight rate that it charges banks. This is the only interest rate the Fed can directly and fully control. That is unlike, for example, bond interest rates, which are determined by the market. "In recent years, the prime rate charged by banks is spread, such as 3%, over the federal funds rates," he says.
A Possible Chain Reaction
Rosensweig says that most credit-card rates are variable and determined by the prime rate plus a percentage. That percentage is often quite a large premium over prime, he says. If the Fed shifted to control bank reserves, this could "lead to a chain reaction: Fed funds rate up, prime rate up, and consumers pay even higher interest rates on their credit cards," Rosensweig said. "Not a pretty picture in a moribund economy."
Rosensweig thinks that inflation is not an issue, now, when we have double-digit unemployment. "It might be in a few years, but now we must keep the nascent recovery going," he said. "That means targeting interest rates as low as possible."
If the Fed does shift its benchmark to the interest rate on reserves, it won't be the first time a tool to control money supply was used. Rosensweig pointed to economists termed "monetarists," led by the late Milton Friedman, who "argued that the Fed should target the money supply instead, for example, by controlling the level of bank reserves."
Inflation Or Unemployment?
This was tried after Paul Volcker became Fed Chairman in 1979. The goal was to cure inflation, and it did, but at the cost of our last episode of double-digit unemployment.
Paying interest on reserves is a relatively new tool and was not available at the time Volcker was chairman. But it would still be a tool to control the money supply. It was first implemented in October 2008. Originally, the Federal Reserve was authorized to begin paying interest on balances held by or on behalf of depository institutions beginning Oct. 1, 2011.
But that date was moved up to October 2008 as part of the Emergency Economic Stabilization Act of 2008. The Fed pays interest, currently at the rate of 0.25% on both required reserves and excess reserves.
Unwinding The Stimulus
Both Federal Reserve Chairman Ben Bernanke and Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, have signaled that the Fed does intend to use this new money supply tool to unwind the stimulus. But neither indicated that it would mean a change in the benchmark rate or that the tool would begin to be used any time soon.
In a speech on Oct. 8, 2009 as part of the Federal Reserve Board Conference on Key Developments in Monetary Policy in Washington, D.C., Bernanke indicated that while economic conditions were not right for unwinding the stimulus, the "ability to pay interest on reserves should be sufficient to allow the Federal Reserve to raise interest rates and control money growth."
But he also said "this approach is likely to be more effective in combination with steps to reduce excess reserves." He then went on to explain the three steps the Fed would use:
- Large-scale reverse purchase agreements (reverse repos), which involve the sale by the Federal Reserve of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later data. These reverse repos drain available cash as purchasers transfer cash from the bank to the Fed.
- Offer term deposits to banks, similar in concept to a Certificate of Deposit offered bank customers, that would not be available to be supplied to the federal funds market.
- Reduce reserves by selling a portion of its holdings of long-term securities in the open market
Another Weapon In The Arsenal
Lacker also sees this new tool of interest on bank reserves as just another in the arsenal available for unwinding the stimulus. He said in speech before the Maryland Bankers Association on Jan. 8, 2010 that during the recovery period there will be a risk of inflation edging upward, which has occurred during some past recoveries. He believes the risk appears to be minimal right now. But, he said, "we will have to be careful as the recovery unfolds to keep inflation and inflation expectations from drifting around."
He added that when and how to withdraw the considerable monetary policy stimulus now in place must be done carefully during every recovery. Now with the tool of interest on bank reserves, "the Fed will have two monetary policy instruments at its disposal, not just one."
Traditionally the Fed targeted the overnight federal funds rate to adjust the supply of money. This rate affects a broad range of other market interest rates, influencing growth and inflation, Lacker said. Since October 2008, he said the Fed has the authority to pay explicit interest on the reserve balances banks hold.
Targeting An Interest Rate Range
This gives the Fed the ability to vary the amount of our money held by banks, as well as the federal funds rate. "So when the time comes to withdraw monetary stimulus, the [the Fed's rate-setting arm] will be able to raise the interest rate on reserves or drain reserve balances, or both," he said.
So while there is no question that interest on reserves is being seen as a tool for unwinding the stimulus, it's not as clear that the Fed plans to actually change the benchmark to interest on reserves. But many economists do expect that the Fed will continue to target a range, such as it is now of 0% to 0.25% rather then set a specific rate for the federal funds rate.
When the Fed starts using the new tool of interest on reserves and starts raising that interest rate above its current 0.25%, banks will be less likely to want to lend unless they can get more than the Fed is promising to pay without risk. That will start a chain reaction, as Rosensweig pointed out, which will mean the Fed funds rate will go up, then the prime rate will go up and finally the rate consumers will pay will go even higher.
http://www.dailyfinance.com/story/investing/why-major-change-in-feds-interest-rate-policy-would-be-worrieso/19343213/
Million-dollar homes in California suffer sales drop of 23.8% in 2009
Sales of California homes priced at $1 million or more tumbled for a fourth consecutive year in 2009, according to a report released Thursday.
The number of million-dollar-plus homes sold dropped 23.8% to 18,621 in 2009 from 24,436 in 2008, according to San Diego real estate research firm MDA DataQuick.
The decline was the result of buyers holding back, a weak mortgage market for big loans and the drop in home prices over the last several years, dragging the value of many houses below the $1-million threshold, DataQuick said.
"Prestige home sales are a unique sub-category of the real estate market. The buyers and sellers respond to a different set of motivations," DataQuick President John Walsh said. "In the multimillion-dollar price ranges, decisions are largely discretionary and aren't as dependent upon jobs, prices and interest rates the way they are for most buyers and sellers."
The trend underscores the nature of the state's housing recovery. Sales of California homes at all price levels increased 16.9% last year, to 460,166 from 393,703 in 2008. One in 25 homes sold for $1 million or more last year. The year before it was 1 in 16.
Lower-end homes largely fueled last year's buying spree as investors and first-time purchasers sensed opportunity in steeply discounted foreclosure properties across the state.
The Federal Housing Administration, which insures mortgages often used by first-time buyers with small down payments, has played a big role in supporting the market for lower-end properties in California and some move-up markets.
In higher-priced California communities, such as Los Angeles County, the limit for FHA loans was increased to $729,750 from $362,790 less than two years ago.
But more-expensive homes haven't enjoyed that same level of government support, nor were they hit as hard by the subprime mortgage meltdown.
Traditional luxury markets are faring better than those that experienced large price increases during the bubble years. For instance, $1-million-plus home sales in Riverside County dropped 48.6% last year while Los Angeles County saw a 13.3% decline.
The most expensive purchase confirmed by DataQuick last year was a nine-bedroom, 10-bathroom, 22,721-square-foot home in Bel-Air that was built in 2008 and sold for $26.5 million in July. It was also the largest of the $1-million-plus homes sold last year.
Residential Mortgage Delinquency Rate Surpasses 10%: LPS
When you factor in homes already in the
This rate indicates that more than 7.2 million mortgage loans are now behind on payments, LPS explained, with another one million properties already taken back by banks and in REO status.
LPS’ January 2010 Mortgage Monitor report, shows that within the population of loans that were current at the end of 2008, the percent of “new” serious delinquencies is 4.64
percent – higher than any other year analyzed. Of loans that were current as of December 31, 2008, by December 2009 there were 2.3 million new loans that were considered seriously delinquent.
Seemingly less-risky, prime mortgages continue to loom large as the industry’s big, pink elephant. Prime loans, including agency, non-agency, and jumbo, have experienced deterioration at a worse pace than subprime, Federal Housing Administration (FHA) insured mortgages, and all loans as a whole, LPS said. The company’s analysis shows that within the prime loans category, those with unpaid principal balances between $417,000 and $600,000 have performed the worst.
The Mortgage Monitor report also indicates that 2009 vintage loans are performing better than loans from any of the prior five years and have been steadily improving as pools of loans grow larger. This improvement is attributed to more restrictive underwriting guidelines, but that also means “liquidity is still not available where it is needed most,” LPS said.
The company’s analysis shows that states with most noncurrent loans are: Florida, Nevada, Mississippi, Arizona, Georgia, California, Indiana, Michigan, Illinois, and Ohio.
Those with the fewest include: North Dakota, South Dakota, Alaska, Wyoming, Montana, Nebraska, Vermont, Colorado, Oregon, and Washington.
http://www.dsnews.com/articles/mortgage-delinquency-rate-surpasses-10-lps-2010-02-04
Homeowner Vacancy Rates Remain Virtually Unchanged In 2009
Homeowner vacancy rates remained virtually unchanged in the fourth quarter of 2009, compared with the rest of 2009 and the fourth quarter of 2008. To reduce the vacancy trend,
The rate only slightly wavered from 2.9% at the end of 2008 and 2.6% in Q309. The highest the rate has ever climbed since 1996 was to 2.9% in Q108 and again in Q408.
For rental housing, the vacancy rate dropped to 10.7% in Q409 from 11.1% in the previous quarter but increased from 10.1% in the last quarter of 2008.
For Q409, more vacancies appeared in principal cities, 3.1%, compared to 2.5% in the surrounding suburbs, according to the report. The rate within the city dropped from 3.5% in the fourth quarter of 2008.
More vacancies appeared in the South, 2.9%, edging 2.8% in the Midwest and 2.7% in the West. The Northeast region had a 1.9% vacancy rate. The South also had the highest rental vacancy rate of 13.7% in Q409. The Midwest had a 11.2% rental vacancy rate, followed by the West, 8.9%, and the Northeast, at 7.2%.
To combat vacancies, the US Department of Housing and Urban Development (HUD) recently announced that it would provide financing for owner-occupants looking to purchase real-estate owned (REO) property. Cities like Detroit are taking on the vacancy problem with programs like the Retaining Occupancy on
http://www.nuwireinvestor.com/articles/homeowner-vacancy-rates-remain-virtually-unchanged-in-2009-54571.aspx
29,000 Calif. real estate agents quit
The state Department of
Still, California had one real estate agent for every 25 households in the state by the end of 2009.The decline in agents has led to slightly less competition …
- In 2007, when to total number of people with real estate licenses peaked at 549,244, the state had one agent for every 23 households in the state.
- At the start of the decade, however, there 38 households for every real estate licensee.
- Put another way, California had one agent for every 76 men, women and children in the state in December.
- That compares to one per 69 residents in 2007, when the number of licensees peaked. But that’s down from 112 at the start of the decade.
State figures show further:
- Starting in 2000, California saw an uninterrupted increase in the number of real estate agents for 7 1/2 years while home sales and prices boomed.
- But well into the housing slump, the number of agents began a two-year drop.
- During that time, broker licenses held steady, while the number of “sales agents” — those who must be employed by a broker to work — fell 12%.
- California had a record 398,716 sales agents in November 2007. By last December, there were 350,870 sales agents.
- The number of brokers, meanwhile, increased since November 2007, holding steady at 152,000 or more from April 2008 on.
Even in Tough Times, 77 Percent of Americans View Homeownership as a Part of Their Own Personal American Dream
RISMEDIA, February 4, 2010—A national survey recently released by real estate leader Trulia shows that many Americans feel that President Barack Obama has not lived up to the hope he created during his campaign and his first 30 days in office. In Trulia’s latest American Dream survey conducted online on its behalf by Harris Interactive from January 19-21, 2009, President Barack Obama scored considerably lower marks on the topic of restoring the American dream of homeownership compared to a survey conducted February 20-24, 2009 after his first 30 days in office.
The current survey found that 37% of Americans gave President Obama a grade of “D” or “F” on the decisions he’s made towards restoring the American dream of homeownership compared to only 22% in the February 2009 survey.
Additionally, 54% gave him a grade of “A” or “B” in February 2009 compared to only 37% in January 2010. Despite these lower grades, and the troubles that have continued to plague the U.S. housing market, the survey found that the “American Dream” of homeownership continues to be alive and well with more than three out of four Americans considering owning a home as a part of achieving their personal American dream.
“I am thrilled to see that the American dream of homeownership is alive. If the dream had died we would be in a lot of trouble,” said Pete Flint, CEO and co-founder of Trulia. “Everyone realizes there is no easy fix and we have a long road ahead. Until there is a reversal in unemployment and the growing number of home foreclosures, the U.S. real estate market will continue to see significant volatility. I agree with the results of our survey that job creation and job security have to be the President’s top priority.”
President Obama’s Report Card
Democrats currently rate President Obama’s performance higher than Republicans, but both downgraded the President’s performance in the January 2010 survey compared to the survey Trulia conducted in February 2009. The current survey shows that “A” ratings from Democrats decreased by 19 percentage points and a 3 percentage point decrease from Republicans. Additionally, “F” ratings from Democrats increased by 3 percentage points and by 13 percentage points from Republicans.
Priorities Going Forward
Democrats and Republicans agree on the areas President Obama needs to focus on in 2010 to stabilize the U.S. real estate market. Creating jobs and job security continues to be at the top of the list with 62% of adults referencing it as a key priority for the President. With foreclosures reaching record levels in 2009 and expected to grow even more this year, it’s not surprising that 45% of adults included this as an important area of focus. Rounding out the top three priorities for President Obama is bringing/keeping low interest rates at 39%. Only 27% of Americans surveyed believe extending the home buying tax credit through the end of 2010 should be a key initiative to help stabilize the housing market.
This sentiment was also echoed on Trulia Voices Community, with many users feeling that President Obama tried to do too much, and that the key to fixing the economy and housing market will be to focus on creating new jobs and job security.
Positive and Negative Views
The majority of Americans surveyed were unaffected by the events that have transpired during the past year in the housing market, with 60% saying their view toward homeownership is unchanged. Slightly more of those surveyed have a more pessimistic than positive outlook with 21% saying they have at least a somewhat more negative view toward owning a home compared to 20% having at least a somewhat more positive view.
http://rismedia.com/2010-02-03/even-in-tough-times-77-percent-of-americans-view-homeownership-as-a-part-of-their-own-personal-american-dream/
CA Mortgage News- Inland Empire Foreclosure News, False Sense of Security?
There might be hope for places like Riverside, Corona, and Lake Ellsinore areas. According to a report in our local news paper the Press Enterprise a California real estate research company is anticipating that the worst of the foreclosures are behind us.
According to their reports foreclosure filings have been slowly declining.
However their report also stated that foreclosures could also remain at historically high numbers and especially in already hard hit places like Riverside, San Bernardino and San Diego Counties.
The number of default notices has been decreasing in the later ½ of 2009, but we in the industry know it will shift again as a load of adjustable rate mortgages set to re-set to higher interest rates within the next 24 months.
Remember the decrease is partly due to the banks imposed moratoriums so we are still waiting for that back log to hit the market. I love how these reports try to spin a positive and hopeful outlook and forget the truth of the situation. Reality is that we are not really better off than we were in 2009. There is another wave of mortgages ready to re-set to higher rates, people are still loosing jobs and loosing pay (another 5% pay cut is expected for California state employees), and there is the backlog of foreclosed homes that the banks have been sitting on ready to flood the market. Get ready for a roller coaster ride for 2010.
