The Fed is Concerned About the "D" Word

By
Real Estate Mortgage Broker with America's Mortgage LLC

By their words it is obvious to me that the Fed is concerned about the "D" word. And the "D" word is not Depression; it is Deflation. The Fed did not explicitly mention deflation; but the fact that they did not mention the containment of inflation in their policy statement tells me they are concerned about deflation.

•·         Deflation is a condition where prices are always dropping so why buy now? Imagine if every purchase we made was like the purchase of a high tech device like a laptop or HDTV-unless you "needed" it right now, why would you buy it right now? If you wait 3 months its price will be lower.

•·         Japan has struggled with deflation for over 15 years and it is very difficult to eradicate from your economy once it sets in. Deflation is harder to fight than inflation; thus we prefer inflationary pressures over deflationary pressures.

•·         We will most likely see the Fed Funds Rate at 2% or lower throughout 2009.

•·         It appears that the Fed is committed to keeping mortgage rates super low. How low? I don't know for sure as they did not say. I would assume with 99% certainty a rate below 5.50% and with 60% certainty rates below 5%.

•·         For how long? I could see this being the case for 6 to 9 months maybe. Why? Fewer people normally buy a home in the dead of winter and we are 4 months away from the beginning of the buying and selling season. Or until housing sales rebound nicely nationwide.

 

 

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Topic:
ActiveRain Community
Location:
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Rainmaker
504,334
Ann Heitland
Flagstaff Real Estate - Associate Broker, GRI, CRS
RE/MAX Peak Properties

Can the Fed get mortgage rates low enough, or will there need to be a specific Treasury (Congressionally authorized) subsidy?

December 16, 2008 10:49 PM
Rainer
25,375
Lonnie Glessner
America's Mortgage LLC

I think the Fed's comments can get rates down to 4.50% which has been NAR's and NAHB's goal. I was surprised that mortgage rates did not drop to that level today; but I think it was because the banks have so much business already and they realize they can't accept much more business wiithout clogging the system for weeks and weeks.

Hopefully, banks might actually hire people. One of my banks, AmTrust, announced 2 weeks ago that they had a record volume of loans locked in one day. Then, a week later they announced more layoffs.

Second, i hope the rates stay low for a long period of time as I can't imagine refinancing every client in my database, about 400, in 1 or 2 months.

December 16, 2008 11:15 PM
Rainmaker
389,887
Richard T. Dolbeare
R(B), ABR, CRS...Hawaii Multi-Island Specialist
Keller Williams Realty

Fed Funds Rate is now lower than when you posted.  Incredible.

December 17, 2008 01:03 AM
Rainer
134,328
Mike Michaud
North Texas Help-U-Build

Deflation is closely linked to depression.  It was one of the factors that made the depression of the '30s "great"

December 17, 2008 01:10 AM
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Rainer
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Lonnie Glessner

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