Rate cuts bring a chance at relief

A real estate sign announces "New Price" in front of an existing single-family residence for sale in Park Ridge, Ill.


Tess Vigeland: We learned this week -- to no real surprise -- that median home prices in this country fell last year for the first time in at least four decades.

All kinds of housing market rescue plans are in the wind. This week Senator Chris Dodd proposed a $20 billion program that would buy up bad mortgage loans and issue new ones to borrowers who can't afford their homes. The federal stimulus package may raise the limit on the size of mortgages that Fannie Mae and Freddie Mac can buy.

And then, of course, there's the Fed's big three-quarter point rate cut this week, but if you're confused about who it helps, housing economist Nick Retsinas is here.

Vigeland: Thanks for joining us.

Nick Retsinas: Nice to be with you.

Vigeland: We've talked with you before about the impact of interest rates on various mortgages, but I think maybe this time is a little different because the rate cut was so large: three-quarters of a percentage point, the most aggressive in about 25 years. So, there's some talk out there that this will help the housing crisis. Let's start with what it means for those folks with adjustable mortgage rates that will reset after a certain period of time. How big an effect could this rate cut have?

Retsinas: Well, it certainly will help. Anytime the cost of money is cheaper -- that is, the interest rates are lower -- that's a good thing for people who need money. So people who have adjustable rate mortgages, where their mortgages are calibrated to be reset at certain points of time, this'll probably slow down the resetting.

Vigeland: Is it enough to save some people from foreclosure?

Retsinas: That I don't know. The people in foreclosure are already probably too far along to refinance into other mortgages, because what this does, essentially, is make the cost of credit less, but it doesn't give you access to credit. So people who've already sort of started started out of delinquency, default, headed towards the foreclosure path probably are too far along to get any benefit from this rate cut.

Vigeland: OK, so let's talk about fixed mortgage rates then that are not adjustable rate. This is the typical 30-year, 20-year fixed mortgage. They are not tied to the Fed's short-term rate, but they're down anyway, right?

Retsinas: They are down and they have been down. They're down in large measure because people who have money around the world think we're likely to enter a period of recession, so they're willing to accept a much lower interest rate. The Fed funds rate -- that is the action taken by the Federal Reserve -- affects short-term borrowing. Right now, in the United States, most people buying homes or refinancing are looking for long-term fixed-rate mortgages. That money doesn't come from the Federal Reserve; it comes from global capital markets.

Vigeland: So is it time to refinance?

Retsinas: We're not sure how long rates will stay down, so if you have access, if you have good credit and you can refinance into a longer-term fixed-rate product, this is a good time to do so.

Vigeland: Let's talk about other loans, if I can take you out of the housing sector for just a moment. Car loans, credit card interest rates could go down, right?

Retsinas: They're a little more sensitive to short-term borrowing rates, because you're not going to get a 30-term fixed-rate car loan -- cars don't last 30 years. So they're more closely aligned with changes in short-term borrowing rates and they're more likely to benefit more directly from the action of the Fed.

Vigeland: How long does that usually take to happen?

Retsinas: My sense is over the next 60 days, you'll start to see new loan terms that reflect the low rates.

Vigeland: And on the downside, any sort of rate cut is never good news for savers, anyone who has a savings account or CD.

Retsinas: They are very closely aligned with the Fed funds rate, so therefore, you're going to see drops almost instantaneously, but clearly by next week in a lot of the offerings for certificates of deposit. What used to be pretty clear options, say over 5 percent for a 2-year certificate, now you're going to be hard-pressed to find one over 5 percent.

Vigeland: Alright, thanks Nick.

Retsinas: Thank you Tess.

Vigeland: Nick Retsinas is director of Harvard's Joint Center for Housing Studies.

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