Will the panic on Wall St. today over sub-prime lenders prompt the FOMC to drop interest rates?

Question

Wall St. is in a panic today over the bankruptcy of New Century and other sub-prime lenders. These type of mortgages make up 20% of the new home mortages in the housing market.
The inventory of new homes on the market is already more than double the demand. If sales drop another 20%, property values may start to fall and cause problems with existing homes financed up to 90% value.
Is the problem as serious as the panic sellers on Wall St. think? Will it require FOMC action to avert a recession? Or, is today's panic much ado about nothing?

Answer 1

The housing market got ahead of itself. This is an important sector of the economy, but not the only one. It would take an extraordinary lowering of rates to "fix" the housing market - probably 1.5-2 points - and this would have too many unintended inflationary consequences on the rest of the economy.

This problem will sort itself out. Weaker players will go under, and like the bursting of the internet bubble, new rules will make the pain less severe next time around.

Answer 2

The big banks knew that sub-prime was risky and high profit if they could manage the risk. Next time you get a $35 bill for late payment / over limit / NSF or whatever, ask yourself how much sympathy you have with them. This is a cake walk for the big boys and some of the smaller guys will end up being eaten.

Sub-prime is a fringe activity, nobody in the government is going to do anything about it.

The housing market will probably recover for a short while but the demographics of the baby boomers retiring will inevitably drop the housing market like a stone. No saying when but sometime in the next 5 years and it will be wild. When it happens, adjusting the rates will do no good whatever - insufficient buyers for the volume of homes.

Now is a good time to get out and retire in Central America. Ask me how :-)

Answer 3

This drop-off when added to the markets falling a couple weeks ago make this more serious. The market is down over 800 points and Wall Street should just relax and let things get stable before they panic any further. Maybe a small decrease in interest rates would be good in the short term.

Answer 4

I've been hearing about this coming for a month now... seems to me they could have planned better for the future... I mean come on.. the market is very fluid.. but they were cutting mortgages like it was going out of style at ridiculous rates knowing full well.. or ignoring the fact possibly.... that it inevitably had to come back down one day... none the less I think they'll figure out a way to fix it.

Answer 5

I'm going to go with much ado about nothing, but one never knows. Seems there have been a couple of days lately that have been good days to buy cheap, hope I'm right.

Answer 6

No. The economy is still hot and they will wait for a down turn before they lower rates. If they lower the rate now, they will cause inflation, but they are inflation hawks so they won't.

Answer 7

I wouldn't be surprised if rates are considered to be cut based on what is happening. It may take slipping into a real market correction first and not just some jittery investors. We'll see.

Answer 8

Wall Street lives on panic. Today's panic will be tomorrows profit.

Answer 9

It's going to be Texas all over again,

I do not think they will allow like 75% foreclousures on loans.

Answer 10

this slide must be stopped at all cost, or people might actually be able to buy affordable homes.