Although Wall Street has been exuberant for the past two days about the Federal Reserve’s decision to cut a key interest rate, the reaction on Main Street has been more muted.
Mortgage and real estate brokers say that the Fed’s decision will help some homeowners pay off their bills instead of going into foreclosure. In addition, a congressional initiative to ease lending restrictions at the Federal Housing Administration may bring buyers to the market.
But most say that the interest rate cuts and legislative reforms will not immediately revive the real estate market. Instead, home prices and sales will stagnate or decline deep into next year, with no recovery until late 2008 or early 2009, they say.
That’s not much different from what people were predicting before the Fed made its cut.
“I believe the market will weaken more in the next few months, and it may weaken over the next year,” said Gary London, president of the London Group of Realty Advisors in San Diego.
“We’re two years into a housing downturn, and it’s not unreasonable to expect another year of this,” he said.
London added that his prognosis is based on the assumption that the economy doesn’t slow down more than expected or go into a recession.
“If the economy recesses, all bets are off,” he said.
The Federal Reserve’s trimming of the interest rate was intended to prevent the housing market – which has been slowing or declining since mid-2005 – from dragging the economy into recession. The Fed trimmed its federal funds rate, a key benchmark for lenders, from 5.25 percent to 4.75 percent on Tuesday.
At the same time, Congress has been preparing new legislation to raise the lending cap for the Federal Housing Administration.
The White House yesterday appeared to soften its opposition to a congressional initiative that would allow Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities loans exceeding $417,000. Another initiative would allow the FHA to extend home loans for at least $417,000, instead of the current cap of $362,790.
Although such moves will benefit people hoping to buy into high-priced San Diego County, where the median home costs $490,000, they will not spark a quick turnaround in the market, many mortgage and real estate brokers said.
“This will help people coming into the market to buy homes,” said Jan Wright, a San Diego real estate agent, who specializes in selling foreclosed or distressed properties. “But adjustable rates are going to go up no matter what. Anyone who has two-year, three-year or five-year adjustable notes is going to get hosed no matter what.
“The whole point of those products was to refinance when the home appreciates in value. But homes aren’t appreciating,” she said.
Wright said she is seeing sharp cuts in home prices, which she expects to continue. She just helped sell a home for $350,000 that was purchased a year ago for $395,000.
“The guy, who had a two-year adjustable rate note, was looking at a homeowner across the street who had just brought his sale price down by $200,000 and another neighbor who was going into default, and he figured he would sell his house and just rent until the market settled,” Wright said.
She expects that such sales will continue despite the Fed’s rate cut.
Roxie Chilcott, a mortgage broker at Acoustic Home Loans in San Diego, said the Fed’s cut is already having an impact on mortgage rates. The rate on a 30-year fixed mortgage dropped this week from an already low 6.31 percent to 6.125 percent, she said.
Fixed rates are typically tied to the bond market rather than the Fed’s rate cuts. But this week, the bond market was anticipating the impact of the Fed’s decision.
Chilcott added that there are limits to how far mortgage rates should dip. “Do we anticipate further reductions in the near future? Maybe, but only slight cuts,” she said. “There’s just no reason the mortgage rate should go into the mid-5 percent range.”
Rani Isaac, an economist with the California Research Bureau, predicts that even with relatively low interest rates, home prices in San Diego will decline 8 percent next year, compared with a 3 percent decline this year.
“By the end of next year, sales will begin to pick up, but they’ll be nowhere near where they were in 2000 to 2006,” she said.
Mary Otero Gonzalez, president and chief executive of the San Diego Home Loan Counseling and Education Center in North Park, said she believed the Federal Reserve’s action would increase home affordability in San Diego County. It will translate into lower lending rates that “are definitely going to assist clients in qualifying for more homes,” she said.
Gonzalez said she didn’t believe the move would help thousands of homeowners with little equity who are struggling to pay adjustable subprime loans, however.
“If their loan is upside down – where they owe more than it is worth – it will be difficult for them to refinance,” she said. “They probably won’t be able to.”
Ed Smith Jr., vice president of governmental affairs and industry relations for the California Association of Mortgage Brokers, said it’s unlikely that reducing the Fed’s benchmark interest rate would help people who are unable to make payments on their adjustable subprime mortgages.
“The real issue is they need to get into a sustainable fixed-rate amortized loan,” Smith said. “Most of those subprime products are tied to the LIBOR (London Interbank Offered Rate), and the LIBOR is a very volatile index.”
Homeowners are more likely to get more relief from efforts in Washington to to expand the federal backing of mortgages through the Federal Housing Administration, Smith said.
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