Rate Cut May Give a Boost to Housing Market The Federal Reserve's vote to cut a key interest rate by a half a percentage point aims to keep the economy growing at a time when the world's credit markets are taking a beating. The cut may help the beleaguered housing industry, at least over time.
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Rate Cut May Give a Boost to Housing Market

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Rate Cut May Give a Boost to Housing Market

Rate Cut May Give a Boost to Housing Market

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This is MORNING EDITION from NPR News. I'm Renee Montagne.


And I'm Steve Inskeep.

Now the question is how long the giddiness will last. Stock markets around the world have soared since yesterday, when the Federal Reserve cut a key interest rate. The Dow Jones Industrial Average had its best day in more than four years. The Fed was responding to a drop in housing prices and trouble in the mortgage industry. But even with lower interest rates, a revival will not happen over night.

We begin our coverage with NPR's Jim Zarroli.

JIM ZARROLI: The Fed had been signaling that it was ready to cut rates. The only question was by how much? As it happened, the Fed cut both the discount and federal funds rate by a half percentage point on the high side of expectations. Economist Nariman Behravesh of the research firm Global Insight says the move was a response to the current turmoil in the credit markets.

Dr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): What it does is it sends a very strong signal to markets that the Fed is on top of things, that the Fed does not want this crunch to become anything worse, and especially no to spill over to the rest of the economy. So it's a way of signaling to the market we know there's a problem. We're doing something about it. Don't worry. Don't panic.

ZARROLI: The rate cut yesterday was a response to the first real crisis of Fed chairman Ben Bernanke's tenure. The credit markets had been roiled by the downturn in subprime mortgages. A lot of investors have lost money and mortgage-backed securities, and no one can really say how far the losses extend. That's made lenders gun shy about where they put their money and cast a poll over the economy as a whole. And the downturn has been felt all over the world.

Former Fed governor Alice Rivlin, who's now at the Brookings Institution, says the Fed's move is designed to assuage lender's fears.

Dr. ALICE RIVLIN (Director, Economic Studies, Brookings Institution): It makes it a little cheaper for the banks to borrow money, and therefore, cheaper for them to lend money. What they're hoping is this will reassure all of the financial services institutions that things are returning to normal and that they might as well go back to lending to credit-worthy borrowers wherever they can.

ZARROLI: Yesterday's rate cut sent stock prices through the roof. Among the best performing shares were homebuilders, which have had a spectacularly bad year. But the impact on the housing sector remains unclear. The interest rates controlled by the Fed are short-term rates, and cuts on those rates can make certain kinds of consumer credit cheaper. But that doesn't typically include longer-term mortgage rates, which tend to be set by the markets. And while mortgage rates tend to follow Fed rates, the process can sometimes take time.

Edward Leamer, who heads the UCLA Anderson Forecast, says even if mortgage rates do come down, it won't be enough by itself to end the housing recession.

Dr. EDWARD LEAMER (Director, UCLA Anderson Forecast): There's not going to be a lot of joy out there in those neighborhoods where the foreclosures and delinquencies are already high.

ZARROLI: Leamer says housing prices are still too high in many places, and many people who want to buy houses can no longer qualify for mortgages. Alice Rivlin says it's really a supply problem.

Dr. RIVLIN: We built too many houses, and we have an excess stock of housing, particularly high-end housing. We're going to have to work through that.

ZARROLI: As for where the Fed will go from here, Rivlin says she sees nothing in yesterday's statement to suggest there will be anymore rate cuts. But some economists disagree and predicted more moves by the Fed in October. All that certain is that things are changing fast.

A little more than a month ago, Fed policymakers were downplaying the risks of the mortgage meltdown. Now they have reversed course and made clear they're ready to keep cutting rates if conditions warrant it.

Jim Zarroli, NPR, News, New York.

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