business

Band-Aid or cure?

The Federal Reserve's decision Tuesday to cut the federal funds rate a half percentage point won't provide a long-term fix for the sagging housing market, but it could result in cheaper adjustable-rate mortgages, increased liquidity and a psychological boost.

Will that be enough to spark a turnaround in the market?

"It's a good sign, but I'm not sure it will make a ton of movement," said Bob Peltier, president of Edina Realty.

That may be because rates on long-term mortgages -- the kind that most people use when they buy a house -- aren't heavily influenced by the federal funds rate. Furthermore, the markets have already factored in Tuesday's rate cut -- the first in four years.

Still, because the Fed's action will cut the cost of short-term borrowing on some credit cards, home-equity loans and other consumer credit, homeowners might feel a little less financial pressure, and that could boost consumer confidence.

Meanwhile, in an attempt to jump-start home sales, Edina Realty is offering a one-year, one-percentage point discount on FHA and VA mortgages originated through the company. The promotion is the third of its kind by the company in 18 months.

Mortgage rates near lows

In recent weeks mortgage rates have fallen to within a percentage point of the all-time lows that helped push home sales and prices to record highs nearly three years ago.

The benchmark 10-year Treasury yield, which generally runs parallel to fixed-rate mortgages, fell from 5.19 percent during the first week of July to 4.38 percent a week ago. "You'd have to go back to early 2006 to find a similar environment for the 10-year Treasury," said Michael Swanson, vice president and senior economist with Wells Fargo in Minneapolis.

The Fed funds rate is more closely tied to the price of adjustable-rate mortgages (ARMs), which in recent months have fallen from grace among home buyers who are leery of their sometimes painful rate adjustments.

While Tuesday's announcement won't wipe away future rate increases for people with adjustable-rate mortgages, it could reduce their size.

"The payment still increases, but that difference is very significant to homeowners wondering how they're going to handle a payment increase," said Greg McBride of Bankrate.com.

Until two years ago, most borrowers favored ARMs even though fixed-rate loans were only marginally higher and offered more long-term security.

Today, a growing number of borrowers are shifting to long-term fixed rates even though introductory rates on short-term adjustables have fallen relatively dramatically in recent weeks.

More Fed rate cuts may lie ahead. Investors in the Chicago Board of Trade fed futures market are betting that the rate will fall to 4.25 percent in May 2008.

That could be good news for people who are trying to refinance out of their mortgages or who are worried the market hasn't hit bottom yet as a liquidity crisis on Wall Street makes access to credit more difficult.

The Fed's action comes at a critical time in the housing market as homeowners watch some of the price gains they've made in recent years slip away.