From Owen, our in-house lender:
It is never good karma to seek gain at the expense of others (just ask Earl), unfortunately our interest rate trends tend to move inversely when compared to the health to the overall economy. Yesterday’s top three headlines: “Lehman Re-jigs Mortgage Biz, Cuts 850 Jobs”, “Countrywide Cuts 900 Jobs”, and “New Foreclosures Reach Record Level” pretty much sum up the state of our economy.
We'll throw in a fourth: IndyMac is laying off 1000.
BIG NEWS YESTERDAY: The August jobs report was decidedly weak, showing the first contraction of the labor force in 4 years and increasing the odds that the FED will lower the funds rate in coming months. Poor jobs figures typically come in sets so expect this trend to continue and to gain steam over the next few quarters. Expected to be up 110K, Non-Farm Payroll was actually down 4k, and June & July numbers were revised down a total of 81k! This is the worst jobs report in four years, and virtually guarantees a Fed Funds cut on September 18th. And it doesn’t even include the mortgage job cuts for August. The Unemployment Rate was unchanged at 4.6%, and Hourly Earnings were +.3%. The prospects for a FED cut was already baked in to some degree but recent jawboning by the media was beginning to cast some degree of doubt on whether the FED should act, or let the markets sort themselves out. I think that talk is over with for now, and this could be the start of a much needed downtrend in rates to help pick up mortgage activity.
At least one influential economist is urging the Federal Reserve to cut interest rates quickly and preemptively.
Fed Board of Governors’ member Frederic S. Mishkin said in a white paper that the Fed could prevent a lot of damage from a severe housing slump by acting swiftly to cut interest rates aggressively before the slump gets any worse.
Mishkin says the harm that falling home prices do to the economy is predictable, so there's no value in waiting until the damage is done. By acting quickly, he says, the Fed can buoy consumer spending and minimize the loss in economic output while suffering only a small increase in the inflation rate. Such a policy, he writes, "can be extremely successful at counteracting the real effects of [a] very large housing slump."
The required cuts would actually be slightly less than the total under a typical monetary policy, he says, because they would forestall part of the economic decline. Rates would hit bottom about two years after a price decline begins. Under a traditional strategy, Mishkin says, rates wouldn't hit bottom until three or four years after a housing slump takes hold — and economic output would suffer a much bigger hit.
