Edd Gillespie Appraisal

Does the FED rate cause the average 30 yr mortgage rate to move up or down?  The data supplied by the Federal Reserve Bank indicates that with the exception of the period from 1979 to 1981 the FED lags the 30 yr average mortgage rate.  In chart form the two rates plot like this:   

Dan Green, http://themortgagereports.com/, discusses the relationship between the FED and the bank rates as follows:

“This point (FED influence on bank rates) takes on added significance 8 times annually when the Federal Open Market Committee meets.  The FOMC is the policy-setting ARM of the Federal Reserve.  It raises or lowers the Fed Funds Rate to slow down or speed up the economy, respectively.  The Fed’s actions are so important to markets and investors that news organizations like the Wall Street Journal dedicate entire sections to things like “Fed Watching“. Comprehensive coverage doesn’t make the Fed Funds Rate any less misunderstood, however.  Even the brightest of the bright mistake the role of the FOMC in mortgage markets.  The Federal Reserve does not set mortgage rates. Mortgage rates are based on the raw price of mortgage-backed securities plus applicable adjustments based on a person’s individual risk to a lender.  Or, with respect to jumbo mortgages, rates get set by individual banks.  The Fed does, however, influence rates.  Combining rhetoric with more than a trillion dollars, the Fed has helped keep fixed-rate conventional mortgages below 5.500% for the better part of the year.  And now markets are curious: Is the Fed done with its interventions?”

FOMC met September 23, 2009, and, as expected, the FED rate remained unchanged.  But what the FED said was strongly positive and encouraging with respect to the economy.  The FED commented specifically about the improvements in the housing markets.  Good news!

So with no added pressure from the FED, it remains for the banks to assess their lending decisions and modify their lending standards to meet their business requirements.  What happens to unemployment, in the mortgage backed securities market and with FASB bank accounting standards will have a tremendous influence on lending.

The Beige Book is lukewarm in its assessment of the tenth district economy as of September 9, 2009.  The real estate market in the district appears to be waiting for something.

 “Residential real estate activity softened and commercial real estate contacts indicated market conditions remained fragile. Banking conditions remained tepid partly due to moderately declining loan demand and a negative outlook for loan quality. … Wage pressures remained low and few firms planned to hire new workers.”

 The good news from the Bureau of Labor Standards is that nationally wages are not slipping even though unemployment continues to rise:

 “In August, the number of unemployed persons increased by 466,000 to 14.9 million, and the unemployment rate rose by 0.3 percentage point to 9.7 percent. …and average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 6 cents, or 0.3 percent, to $18.65.”

 Until unemployment declines and more workers are able to earn a living wage, I expect the “soft” and “fragile” labels applied to real estate activity in the region to remain.