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news updated: 10/27/2007 |
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The Impact of the Sub Prime Market |
Article Details |
The sub prime market is sending a series of ripples to the economy. Starting with a slight surprise in sub prime default figures and credit crunching, it has now taken the national economy in a state of decreasing consumer confidence. However, so far it seems that the worst is yet to come.
The U.S. real estate sub prime market might prove to be the most left out in the policies of the Fed. Fearful of the worries of the sub-prime market, credit crunch, and series of foreclosures, the Fed realized an interest cut of 50 basis points in their last round. This cut is aimed to stabilize and encourage investor confidence and to reassure the public that they are on top of the situation. In addition, the Fed also cushioned the blow of the mortgage crash on other industries.
However, the story does not seem to end there. Despite the pro-active efforts of the Fed some consider the action too little too late. While investors find new relief in the interest rate cut, the reality of foreclosures and load default is just as has just started its headway.
The run of the Dow Jones and the enthusiasm of the investors came up along with the cutting of home mortgage rates. The signals are encouraging indeed.
After the rate cut, loans in the prime class markets are expected to sore, while the interest rate for the mortgage will no be so high. The Fed adjustment will also benefit home owners who are in the borderline of defaulting in their loans.
However, this will not help the people in the lower economic class.
With the mortgage markets correcting itself after a series of debacle, creditors are shying away from new borrowers. This move discourages new home buyers to acquire loans that are causing a standstill in the real-estate industry. As a result we are witnessing bleeding home sales figures in the third quarter this year: Sellers cannot sell their homes and buyers are very hesitant to buy.
The shift of real estate as a buyer's market allowed greater pressure to desperately sell their houses while forced to concession that they would not normally do in a normal setting. It is expected that the problem will continue to hit the market in until 2009 putting the American economy in great pressure for the next six quarters.
With the Fed rate cut, analysts hope that it could dampen the rising mortgage rates and increase buying mobility. However, increasing consumer leeway is only half the problem. Since the main reason for the sub prime crisis is the increase in defaulted loans, creditors should also start tightening up their lending policies.
Perhaps the days where people with low credit rating can easily avail a home loan is gone. Moreover, Fed rate cuts that leads to falling interest rates won't save the citizens who just defaulted on their loans as their credit rating will severely be hampered. This means that they will have no ability to refinance their outstanding loans. The borrowers are left dried out with no foreseeable solutions.
What the Fed rate cut effectively did is to encourage consumer spending. With lower credit card interest rates, consumer will find themselves with more disposable income to stimulate growth.
Still, factors such as rising unemployment and hesitance to consume in an economy with signs of recession could more or less hamper the effect Fed rate cuts. After all, these monetary policies would need 18 more months before the impacts are felt.
The Fed’s rate cut is believed to be just one of the several more to come. These policies are aimed to stimulate consumer spending and investment to balance the weight of the fledging home market. While it does not do much to tackle the home mortgage woes directly, the rate cut hopes to avert a possible recession of the American economy.
Since the storm might last till 2009, it is better to put the bets on the safe side. One big leak that the economy has yet to address is the mortgage rates impact on home loans.
With this slowdown, a ripple effect can start that can lead to dampening of related industries like construction. In fact, earnings reports from Caterpillar Inc. last week reinforced speculation that losses from mortgage defaults are already affecting the construction industry.
No one can categorically measure the impact of such low home sales figures on the overall economy.
• Will the low inflation from Fed rate cuts allow more people to look at houses?
• Are there plans to give an alternative to people who have defaulted their loans?
• Are the problems multi-dimensional in the field and in the numbers?
These are some interesting questions as we brave the storm till next year.
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