Business

Interest rate drop draws mixed reactions

"An Oak Harbor real estate appraiser, a lender and a financial advisor disagree on how much real impact this week’s interest rate cut by the Federal Reserve will have on the average person.But they do heartily agree on one thing: It’s a very good time to buy and borrow, whether you’re looking at a home, a car or stocks.In an attempt to head off a recession, Federal Reserve Chairman Alan Greenspan announced this week the lowering of two key short-term interest rates — the discount rate and the federal funds rate — by a half a percentage point. It was the second time in a month that the Federal Reserve cut the rates.Leroy Riepma, vice president of Washington Federal Savings in Oak Harbor, explained that the Fed’s rate cuts don’t necessarily translate into lower lending rates to consumers. The discount rate, for example, is the rate that the Federal Reserve lends money to banks, but most banks don’t even get their money directly from the Fed.When Greenspan announced the cut, Riepma said the mortgage rate dropped by only one-eighth of a percentage. The Fed’s easing of money policy has “a tickle-down effect,” he said, but there are many other factors that affect mortgage rates. Yet the average 30-year mortgage rate is currently under 7 percent, which Riepma says is the lowest it’s been in two years (1998 saw the lowest mortgage rates in a quarter-century), though “not necessarily because of Greenspan.” Compared to Riepma, local real estate appraiser Gregor Strohm is less shy about tying mortgage rates — indirectly — to the Fed’s interest rates. He says the current low mortgage rate makes buying a home much more attractive and affordable. He expects the activity on the housing market to pick up dramatically in the coming months.A low mortgage rate, Strohm explains, can mean a pretty giant savings for consumers. For example, a year ago the rate for a 30-year fixed mortgage was around 7.99 percent. Today it’s about 6.67 percent, depending on the bank.On a $125,000 mortgage, the monthly payments on a 6.67 percent loan would be $804.11. At 7.99 percent, the payment would be $916.33. That’s a savings of $112.22 a month.Another way to look at it, Strohm said, is that a year ago, at 7.99 percent, a person could get a mortgage loan of $125,000 if they pay $916.33 a month. But today, at 6.67 percent, a person could get a mortgage loan of $142,000 at the same $916.33 a month payment.“You can get more house for your money now,” Strohm said. But he warns that the inventory of local homes for sale may become very tight in upcoming months — it’s low now — which could drive the prices up.In other words, Strohm suggests that now is the time to buy, especially in the moderate to low-priced market.Darin Cook, a financial advisor with Edward Jones, says that the effect of the Fed’s rate cuts probably won’t be felt by most Oak Harbor businesses for many months. He says it might take up to a year for “larger ticket retailers” to rebound.But the stock market is a fish of a different color. According to Cook, “the stock market sees nine months into the future,” which means the Fed-induced rebound should occur much quicker.“A bad year for the stock market comes before the recession,” he said. “We are very bullish on the market right now.”“You need to buy now,” he added. “If you wait for the federal cuts to take place, things will be too expensive.”So what stocks does Cook recommended? For investors seeking growth and income, he recommends Duke Energy and Bank of America. For those seeking growth, he recommends Microsoft and Dell Computers. For aggressive growth-seekers, he recommends Motorola. Of course, in considering any advice, a consumer should be aware that these experts may have motives for boosting consumer confidence. After all, economists believe that confident consumers who are willing to spend their money is nearly essential for a healthy, growing economy. It’s a circular argument: Confident consumers spend their money, making the economy healthier, and a healthy economy makes consumers confident. "

We encourage an open exchange of ideas on this story's topic, but we ask you to follow our guidelines for respecting community standards. Personal attacks, inappropriate language, and off-topic comments may be removed, and comment privileges revoked, per our Terms of Use. Please see our FAQ if you have questions or concerns about using Facebook to comment.
blog comments powered by Disqus

Read the latest Green Edition

Browse the print edition page by page, including stories and ads.

Aug 30 edition online now. Browse the archives.