Tuesday, August 12, 2003

Realtors await Fed's signals

By Jeff McKinney
The Cincinnati Enquirer

The Federal Reserve likely will not cut interest rates when it meets today, and that could be good news for consumers still interested in buying homes.

Most experts predict the policy-setting Federal Open Market Committee will leave its key target rate - the short-term rate banks charge each other for overnight loans - unchanged at 1 percent.

Though the Fed's action does not directly affect the direction of long-term interest rates such as mortgage rates, the nation's central bank could send a signal that the threat of deflation is low.

In turn, that could help stabilize a nervous bond market and bring a more gradual rise in mortgage rates than what's occurred in recent weeks.

Over the past six weeks, there's been an unprecedented rate run-up. The Tristate rate for a 30-year mortgage has risen nearly a percentage point. It hit an average of 6.10 percent last week, the Cincinnati Area Board of Realtors said.

The rising rates reduce housing affordability for consumers and could cool a relatively hot home sales market.

The Fed, after not providing a clear direction to the market after its June meeting and being criticized for causing a big rise in long-term rates, will now likely discuss its stance to prevent those rates from rising and slowing the economy.

Jim Russell, director of core equity strategy at Fifth Third Bank, predicted the Fed would change its bias to drop any mention of deflation as a concern. It currently has a "neutral'' bias with an eye on deflation.

He said mortgage rates jumped drastically as the rising 10-year Treasury bond reflected diminished concerns about deflation. Mortgages rates move in line with the 10-year bond.

David Lereah, chief economist of the National Association of Realtors, agreed.

He said the recent rise in mortgage rates were a "correction" from those rates hitting historic lows earlier this year.

Lereah predicted that the average rate on the 30-year mortgage would hit 6.3 percent by year's end.

"If mortgage rates rise, they won't rise much further than where they're at now," he said.


E-mail jmckinney@enquirer.com

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