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Fed decides to leave little in reserve

17th December 2008 | back to article listings BACK    print this article PRINT

Those looking to invest in US property may have been encouraged by a number of possibilities. The number of potential bargains has grown, either through a general dip in house prices or specific opportunities presented by foreclosed property being auctioned off at knock-down prices.

At the same time, those who buy specifically for investment will be hoping to catch the market near its floor, in order that the next upturn will enable their property to appreciate substantially in value.

For both these reasons, any move that bolsters the mortgage market by making such products cheaper may be welcomed. In the first case, this is because it would make buying in America even cheaper, should a mortgage be the means by which such a purchase is funded. Secondly, this a situation could help encourage mortgage borrowing, which in turn could help to stimulate a wider recovery in the market.

Yesterday the Federal Reserve delivered its monthly verdict on the economy and the monetary action it believed was needed. The result was a cut from one per cent. This was not to a specific figure but a range, this being between zero and 0.25 per cent. Even at the latter figure this represents the lowest ever federal funds rate. The federal open market committee accounted for this decision by citing data showing the economy to be slowing, output to be falling and inflationary pressures weakening. As a result the rate may stay low for an extended period of time, the committee stated.

With it now being scarcely possible for the rate to go lower, investors needing mortgages will hope that the results filter through into the market. The good news for buyers, however, is that it may be that even without this happening as a result of the central bank's actions the mortgage market may be on the up.

Such a point was made last week by the Royal Institution of Chartered Surveyors (Rics). It noted that late last month the US Treasury announced plans to buy up mortgage-backed securities. The quid pro quo of this deal was that the mortgage lenders who benefit from this should offer lower mortgage rates.

In the three weeks since that announcement, there was a notable change in the market, with the first two seeing a rise in mortgage applications and the third seeing the number hold steady. Rics suggested this could be the start of a recovery of confidence, albeit one that would take some time to translate into more new building.

As it happened, Rics predicted that the Federal Reserve would cut the funds rate by 0.5 per cent. The fact that they have cut by so much more may give the mortgage market a further boost. Suddenly things may be starting to get better, which may make now a good time to buy.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4548.html. Alternatively, please see our full press release archive.

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