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Fed Keeps Interest Rate Steady As Home Sales Fall

By Martin H. Bosworth
ConsumerAffairs.com

October 25, 2006

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Two troubling signs of the failing housing market hit the news today -- sales of existing homes fell for the sixth straight month in a row, and the national median home price dropped by its largest annual amount in forty years.

Citing the cooling housing market as a sign that inflation was not an imminent threat, the Federal Reserve Board of Governors voted to maintain the prime interest rate at its current level of 5.25 percent.

The current median price for single-family homes and condominiums dropped to $219,800, while overall sales rates slowed to their lowest pace since January 2004.

Every region of the country showed declines in home sales except for the South, which registered a tiny 0.4 percent increase. The Northeast had the steepest decline, at 3.7 percent.

The astronomical gains in home prices over the previous five years are now contributing to the housing market's decline, as nervous buyers are feeling priced out of the market and unable to commit to new purchases.

Many homeowners bought into the market using "creative" loans, such as adjustable-rate or "negative option" loans. The resultant sticker shock has left many owners unable to meet their mortgage payments without severe financial distress.

Homes purchased with "creative" mortgages were usually "flipped" to sell at a quick profit before the interest rate changed. The slowing market has left many homeowners unable to get out from under their debt, and many cash-strapped buyers have been facing foreclosure as a result.

Realtors claimed that the current market slowdown indicated that the bubble was "hitting bottom."

"When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market," said David Lereah, chief economist for the National Association of Realtors.

"Sales will be at more normal levels in the wake of the unsustainable boom that we saw last year," Lereah said.

Others were skeptical, saying that the declines were evidence that there was farther for housing market prices to fall before they flattened out.

The "Paper Money" housing bubble blog said that "EVERY price and sales indicator was DOWN and EVERY inventory and supply indicator was UP, presenting indisputable evidence that the housing market is declining dramatically and thoroughly across every region of the US."

Nowhere To Turn

Meanwhile, the Federal Reserve Board of Governors voted to maintain the prime interest rate at its current level of 5.25 percent, but warned that there were still risks of inflation in the future.

The Fed specifically noted the cooling housing market as proof that economic growth wasn't immediately leading to price spikes in the future.

"Committee judges that some inflation risks remain," the Fed governors said in their statement. "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

The prime interest rate is what lenders use to gauge their own interest rates. Any increase in the prime rate can lead to increases in lending rates for credit cards and home loans, which can push strapped borrowers over the edge into serious debt. The prime rate is currently at 8.25 percent.

The Fed voted 10-1 to keep the interest rate steady, as they have done for the past three months. The sole dissenter was board member Jeffrey Lacker, who voted to increase the lending rate to 5.50 percent for the third time.

With two weeks before a major Congressional election and the economy taking center stage in viewers' concerns, the Fed had no choice but to keep the interest rate steady.

A raise would have further burdened consumers and homeowners, feeding sentiment that the economy is off track, which could translate to anger at the voting booth.

The stock market responded happily to the news, closing past another record high of 12,000 at the conclusion of the day's trading.

But investors still expressed concern that there might be more rate hikes in the future, and that the faltering housing market would drag other economic sectors down with it.

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