Posted by Tim Burrell - The Federal Reserve cut the Federal Funds interest rate by 1/2 point and the Discount Rate also by 1/2 point.  The one is the rate of interest when banks borrow from the Federal Reserve, the other is when they borrow from each other.  There were two quick financial responses.

In the first response,  major banks cut their Prime Rate, the rate that their best borrowers get, from 6.5% to 6%.  The second was an immediate improvement in the stock market, that had been down before the announcement, trading immediately went from negative territory to positive.

The decrease in the Prime Rate affects many homeowners who have Home Equity Lines of Credit (HELOC).  Many of these loans have an interest rate that floats with the prime rate.  So, this decrease will reduce the monthly payments on those loans.  This will have a positive effect on Raleigh Real Estate, as it will enable more families to afford their mortgages and stay out of financial trouble.  It may not directly lower the number of homes going into foreclosure, but it will help.

The decrease in the two interest rates by the Federal Reserve may also further reduce interest rates, eventually but today they went up.  More on that later.  Even though the federal interest rates went down by 1/2 percent, do not expect mortgage rates to go down that much.  There are a great number of factors calculated in setting the interest rate on a 30 year loan, and the changes made by the Federal Reserve are to the rates on extremely short term loans that banks take out in order to maintain the proper amount of liquidity. 

It is not unusual for the interest rates on 30 year mortgages to anticipate what the Federal Reserve will do, so they went down last week.  Immediately after the announcement, they went up, but just slightly as you have to be well tuned in to even notice.  The rate before on a fixed 30 year conforming loan was 5.5%.  The rate on the same loan after was 5.5%.  The part that went up is the cost of the loan to originate.  The rates went up so slightly that the interest rate offered the customer did not change, but the cost of a $200,000 loan increased by about $250.  Most lenders will absorb that cost, so it looks to the consumer like the rate is the same, but it actually went up.  Doesn't it seems odd that a cut in the Federal Reserve rates designed to make loans more affordable would result in an increase in the cost of a 30 year mortgage?  But, if you understand that the market tries to anticipate the move of the Federal Reserve, then corrects when it actually announces its move, it will make more sense.   It is like they say in the Stock Market, "Buy on rumor, sell on news".

So, will this help Raleigh Real Estate?   Only indirectly, as the cost of a conforming mortgage did not change much, and most of our sales involve conforming loans (a loan of $417,000 or less).  The economy will be better, the prime interest rate will be better, the HELOC payments geared to the prime rate will be better, so there may be fewer foreclosures.  But, there are so few foreclosures in the Triangle area that I could only find one HUD foreclosure in our entire Multiple Listing Service.

In general, Raleigh real estate is in good condition, and it will stay in good condition or improve.