While discount rate’s sharply down, 30-yr fixed rate is roughly same as a year ago

The US Federal Reserve has been slashing short-term interest rates since August last year with precious little effect on the one that matters most to homeowners and home buyers: the 30-year fixed rate.

That rate is roughly where it was a year ago, while the discount rate, which is what banks pay to borrow directly from the central bank, is a full four percentage points lower.

The Fed’s opening of the spigot of cheaper money is supposed to spur across- the-board spending and economic growth, reversing the tide of recession, but bankers effectively have put a knot in the hose.

‘Right now, the banks are holding back this flood of cash,’ said Keith Gumbinger, vice-president of HSH Associates, a rate- tracking company in Pompton Plains, New Jersey. ‘They are letting money go out only in a trickle, when they could be letting it out with a great flood.’

The short-term rate cutting has pulled down certain longer-term rates – pivotally the rate on 10-year Treasury notes, traditionally the bellwether for 30- year fixed-rate mortgages. No matter. Those mortgages are still expensive, because banks are skittish about making home loans in the wake of rising delinquencies, declining home prices and the sub-prime mortgage mess.

The rate for a traditional 30-year fixed-rate mortgage was 6.39 per cent as of March 12, according to BankRate.com’s weekly national survey, compared with 6.22 per cent a year ago.

The 30-year fixed rate dropped ‘a hair’ – about 0.125 percentage point – on Tuesday, said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service. BankRate.com didn’t expect its weekly survey to find the rate much lower nationwide yesterday.

In contrast, the Treasury rate was 3.48 per cent on Tuesday, down from 4.64 per cent a year ago.

‘Mortgage rates are nearly one full percentage point higher than they would be under normal circumstances,’ said Greg McBride, a financial analyst with BankRate.com. ‘But with this credit crunch, this is anything but normal circumstances.’

Traditionally, you would expect to pay about 1.5 percentage points more for a 30-year fixed-rate mortgage than what you would earn on a 10-year Treasury note. In the current environment, that spread has grown to nearly three percentage points, making mortgage rates comparatively more expensive than they have been in decades.

That hurts the housing market, and anything that hurts the housing market hurts the economy.

‘Housing was the catalyst for expansion,’ said Paul Kasriel, chief economist with Northern Trust Co in Chicago. ‘The recession in housing is the catalyst for the recession now . . . . What happens in housing doesn’t stay in housing. It permeates the economy.’

‘The housing market was a bubble, but it created a lot of jobs and it created a lot of paper wealth,’ Mr Kasriel said. ‘Because the values went up, a lot of people went out and borrowed against the increased value of their houses and bought Harley-Davidson motorcycles and big-screen TVs. And Wall Street thrived on this. And state and local governments thrived. It was wonderful.’ Now, he said, ‘everything is in reverse.’

That makes banks justifiably reluctant to lend, creating a conundrum for the Fed: Its ability to pour money into the economy is predicated on banks going along.

‘The credit squeeze is a new feature weighing on the economy,’ said Gary Schlossberg, senior economist with Wells Capital Markets in San Francisco.

‘It is pretty typical for housing to lead the economy in and out of downturns. But housing is going through more than a cyclical slowdown. For that reason, it’s going to take longer for housing to recover, which is one reason why we may see a slower recovery.’ – LAT-WP

Source : Business Times – 20 Mar 2008

While discount rate’s sharply down, 30-yr fixed rate is roughly same as a year ago

The US Federal Reserve has been slashing short-term interest rates since August last year with precious little effect on the one that matters most to homeowners and home buyers: the 30-year fixed rate.

That rate is roughly where it was a year ago, while the discount rate, which is what banks pay to borrow directly from the central bank, is a full four percentage points lower.

The Fed’s opening of the spigot of cheaper money is supposed to spur across- the-board spending and economic growth, reversing the tide of recession, but bankers effectively have put a knot in the hose.

‘Right now, the banks are holding back this flood of cash,’ said Keith Gumbinger, vice-president of HSH Associates, a rate- tracking company in Pompton Plains, New Jersey. ‘They are letting money go out only in a trickle, when they could be letting it out with a great flood.’

The short-term rate cutting has pulled down certain longer-term rates – pivotally the rate on 10-year Treasury notes, traditionally the bellwether for 30- year fixed-rate mortgages. No matter. Those mortgages are still expensive, because banks are skittish about making home loans in the wake of rising delinquencies, declining home prices and the sub-prime mortgage mess.

The rate for a traditional 30-year fixed-rate mortgage was 6.39 per cent as of March 12, according to BankRate.com’s weekly national survey, compared with 6.22 per cent a year ago.

The 30-year fixed rate dropped ‘a hair’ – about 0.125 percentage point – on Tuesday, said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service. BankRate.com didn’t expect its weekly survey to find the rate much lower nationwide yesterday.

In contrast, the Treasury rate was 3.48 per cent on Tuesday, down from 4.64 per cent a year ago.

‘Mortgage rates are nearly one full percentage point higher than they would be under normal circumstances,’ said Greg McBride, a financial analyst with BankRate.com. ‘But with this credit crunch, this is anything but normal circumstances.’

Traditionally, you would expect to pay about 1.5 percentage points more for a 30-year fixed-rate mortgage than what you would earn on a 10-year Treasury note. In the current environment, that spread has grown to nearly three percentage points, making mortgage rates comparatively more expensive than they have been in decades.

That hurts the housing market, and anything that hurts the housing market hurts the economy.

‘Housing was the catalyst for expansion,’ said Paul Kasriel, chief economist with Northern Trust Co in Chicago. ‘The recession in housing is the catalyst for the recession now . . . . What happens in housing doesn’t stay in housing. It permeates the economy.’

‘The housing market was a bubble, but it created a lot of jobs and it created a lot of paper wealth,’ Mr Kasriel said. ‘Because the values went up, a lot of people went out and borrowed against the increased value of their houses and bought Harley-Davidson motorcycles and big-screen TVs. And Wall Street thrived on this. And state and local governments thrived. It was wonderful.’ Now, he said, ‘everything is in reverse.’

That makes banks justifiably reluctant to lend, creating a conundrum for the Fed: Its ability to pour money into the economy is predicated on banks going along.

‘The credit squeeze is a new feature weighing on the economy,’ said Gary Schlossberg, senior economist with Wells Capital Markets in San Francisco.

‘It is pretty typical for housing to lead the economy in and out of downturns. But housing is going through more than a cyclical slowdown. For that reason, it’s going to take longer for housing to recover, which is one reason why we may see a slower recovery.’ – LAT-WP

Source : Business Times – 20 Mar 2008