Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 1.000%.

This has caused Prime Rate to fall by 1.000%, too. This is because the Fed Funds Rate and Prime Rate are directly related.

In mathematical terms, the relationship looks like this:

(Prime Rate) = (Fed Funds Rate) + (3.000%)

So, because Prime Rate is the interest rate upon which credit card rates are based, as the Fed Funds Rate falls, so does the cost of consumer debt.

This is how rate cuts spur the economy.

When the Federal Reserve lowers the Fed Funds Rate, Americans spend less money on interest payments. Therefore, there is more money available for savings and/or spending on other goods and services.

Considering that Americans carry $2.5 trillion of non-mortgage consumer debt, the Federal Reserve’s cumulative 1.000% rate cut is now saving Americans $25 billion dollars on an annual basis.

In the face of weak economic data, the Federal Reserve is expected to cut the FFR again this month to jumpstart the economy. Every additional quarter-percent cut would save Americans $520 million in interest payments monthly.

Source
How the failure of subprime mortgages hurts the overall economy
John Gallagher
Detroit Free Press, January 6, 2008
http://www.freep.com/apps/pbcs.dll/article?AID=/20080106/BUSINESS06/801060585/1002/BUSINESS

After demonstrationg tremendous resiliency since the summer, the U.S. economy finally showed signs of breaking last week.

• Oil touched $100 per barrel igniting fears of a consumer spending slowdown
• Unemployment rates reached 5.0% nationwide
• Housing weakness nationwide is dragging on retailers’ sales figures

Markets appear to have abandoned the notion of runaway growth and are now wondering “how slow?” and “how soon?”.

Coincidentally, three Federal Reserve Bank officials are speaking publicly this week and may help provide some clues. Predictably, newspaper articles are discussing the likelihood of a Fed rate cut.

It’s important to remember that when the Federal Reserve lowers the Fed Funds Rate, it is not lowering mortgage rates, too. Instead, mortgage rates are determined by the price of mortgage bonds.

Bonds prices — like stock prices — are based on supply and demand and are not set by a government policy. Just like the Federal Reserve can’t set the price for IBM stock, it can’t set mortgage rates, eigther.

However, the Federal Reserve can influence mortgage rates.

This is because part of the Federal Reserve’s role is to manage inflation in the U.S. economy and inflation rates are directly connected to mortgage rates. As inflation pressures increase, mortgage rates usually rise.

So, if the Fed speakers express concern about inflation this week, expect mortgage rates to elevate. If the speakers say that inflation pressures have subsided, expect mortgage rates to idle or fall.

Either way, whether the Federal Open Market Committee reduces the Fed Funds Rate by a half-percent, quarter-percent, or not at all at its next meeting, mortgage rates will move to their own beat.

If the risks of inflation outweigh the risks of recession, mortgage rates should rise.

On the first Friday of each month, the Bureau of Labor Statistics releases key data about the American workforce.

The report is officially called “Non-Farm Payrolls” but most people refer to it as the “jobs report”.

The jobs report’s influence on markets is palpable for two major reasons:

1. Consumer spending makes up two-thirds of the economy
2. When more people are working, there is more consumer spending

When consumer spending is strong, the economy expands. This tends to be bad for mortgage rates because a growing economy is at risk for inflation.

Inflation causes mortgage rates to rise, making home ownership more expensive.

By contrast, when consumer spending is low, the economy tends to contract. This tends to be good for mortgage rates because — well — it’s not inflation.

So this morning’s jobs report held two key data points:

1. The Unemployment Rate reached 5.0% in November 2007
2. For all of 2007, payroll growth averaged 111,000 per month, down from 189,000 in 2006

The newspapers and television shows are saying that this news is terrible and that the U.S. is headed for recession. That point is debatable. What isn’t conjecture, though, is that with fewer Americans in the workforce, there is less money available to propel the economy forward.

That’s why mortgage rates should fall today — because the threat of inflation is reduced.

Source
U.S. payrolls rose 18,000 in Dec
Glenn Somerville
Reuters.com, January 4, 2008
http://www.reuters.com/article/economicNews/idUSN0324081520080104

Courtesy of HomeGain.com, a clever tool that helps homeowners preparing to sell their homes.

The Home Sale Maximizer asks 10 basic questions about the home’s condition and then recommends which home improvements to make prior to listing the home for sale.

The quiz results provide:

• The average cost for improvements (by zip code)
• The expected increase in sales price
• The average return on investment

Most of the information is common sense, but it helps to proposed improvements in terms of ROI. Suddenly, spending $400 on lighting may seem prudent when it could add $1,200 to the final sale price.

In addition, HomeGain’s site offers a “Ready To Sell” Checklist, separated by home area.

Real estate is a local phenomenon. Each home in each neighborhood is unique and has its own selling points.

This is the biggest reason why national home sales data is useless to a home buyer or home seller — “national” has nothing to do with you or your street.

Despite that separation, one of the real estate market’s biggest influences is the global political arena.

This is because mortgage rates determine home affordability and mortgage rates are highly susceptible to geopolitics. A terrific example comes from the assassination of Pakistan’s opposition leader last week.

Consider the following facts about Pakistan:

1. It has nuclear capabilities
2. It is located on or near several important oil pipelines
3. It is in a state of political unrest

Instability in Pakistan threatens the economies of many other nations and after the assassination, an investor’s risk assessment of the global economy changed instantly.

And this is where real estate markets get helped.

The U.S. economy is the world’s largest marketplace (by a long shot) and so when investors want safety, they move their money to the U.S. markets. This includes purchasing mortgage bonds.

The extra demand for mortgage bonds means that the interest rate offered of them does not need to be so high. So, mortgage rates fall. This aids home buyers and home sellers because real estate becomes more affordable.

In general, the greater the political uncertainty worldwide, the more that the average buyer or seller will benefit.