The Wall Street Journal reported that Federal Reserve Chairman Ben Bernanke moved aggressively to stop the spreading credit crunch from sinking the nation's economy with a surprising half-percentage-point cut in interest rates, casting aside for now worries about appearing to bail out investors. The Fed cut its target for the federal-funds rate, charged on overnight loans between banks, to 4.75% from 5.25%. It also cut its discount rate, charged on direct loans to banks, by the same amount, to 5.25%.
During an interview with Fox News Channel's Neil Cavuto, former Fed Chairman Alan Greenspan interpreted the Fed's action as a question of punishing speculators versus doing something that they perceived to be in the greater good. Refraining from making the sub-prime mortgage market absorb greater losses, the Fed moved to take some of the chaos out of the financial marketplace. As a result, the Dow, up just 70 points before the decision was announced, soared 2.5%, to 13739.39, its biggest percentage gain since 2003.
The impact of the cuts on the multifamily industry may not be so positive. Earlier this year, Dave Seiders, chief economist and senior staff vice president of the National Association of Home Builders (NAHB) presented his annual Multifamily Housing Outlook. His analysis included the peak years of highest vacancy for rental housing in 1989, 1993 and 2004.
The Fed rate during those years of high rental vacancy was at historical lows. Whether this is a factor of low interest rates drawing renters into home ownership or keeping delinquent homeowners in their houses as opposed to returning them to renting is unclear. This time around, multifamily developers and owners should be cautioned that rental vacancies may be exacerbated by the depression of single-family home values arising from the burst of the housing bubble.
Source: MultifamilyBiz.com