By:Dennis Norman
Today,as expected,the Board of Governors of the Federal Reserve System slashed the discount rate (the interest rate the Federal Reserve charges on loans to commercial banks) from 1.25% to 1/2%. This action will lower the prime rate charged by most banks to around 3.25% which will be the lowest prime rate has been since the mid 1950′s. In the 50+ years since prime rate was last this low it his 10% in 1973 rose to 12% by 1974,15.75% in late 1979 (when I got into the real estate business) then topped out at a whopping 20.50% in early 1981 and spent most of the year at that rate.
A press release issued today by the Fed said that “financial markets remain quite strained and credit conditions tight.” It went on to state “the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability….over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets”.
While the reason for this action is negative in that it is a result of our suffering economy I think the action by the Fed Reserve is a positive one for home owners. By continuing to lower interest rates and,perhaps more importantly,trying to shore-up the market for mortgage-backed securities they are taking action that should help stabilize the housing market. Once the market for mortgage-backed securities shows some life again that should make home mortgages with reasonable pricing and terms much more widely available to credit-worthy borrowers so that they can take advantage of some of the great buying opportunities that exist presently.
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