Tuesday, January 22, 2008
The Federal Reserve's decision today to cut both the fed funds rate and the discount rate 3/4 point have far reaching and many potential beneficial implications for the nation at large as well as our local economy. First, it should be observed that the market's tail is wagging the fed's dog. In other words, it's become obvious that the fed is very reactive to the market's dips. For New York, this is actually a big positive in the short term. A proactive fed that is supportive of the financial markets helps minimize or at least reduce the damage to Wall Street, which is a large contributor to the New York economy. Long term, the fed risks overstimulating the economy, however, that looks extremely unlikely in the short term. An aggressive fed accelerating rate cuts is beneficial both nationally and locally. Nationally, a substantial drop in the fed funds rate will likely result in lower mortgage rates. Lower mortgage rates should shorten the depth and length of the mortgage crisis. Even though the bulk of the rate cuts are not passed on to consumers, the fact that banks have the opportunity to earn greater spreads is also beneficial. The last thing this country or economy needs is a bank failure, and any relief to banks at this point could head off larger problems down the road. This brings me to New York. So far, from a real estate perspective, we have dodged bullet after bullet without seeing meaningful price depreciation. We have certainly found ourselves in the enviable position of being seen as a blue chip investment to foreign buyers who see the NYC market a relative bargain compared to international cities, and they are operating with strong currencies relative to our dollar. A scenario where mortgage rates come down quickly will only reinforce the dynamics that we already have in place, and enhance the values of Manhattan properties. We seem to be in a stable market that is on the verge of further stimulus. While it can't be said that we are out of the woods, the quicker the fed acts, the faster NYC real estate prices should resume it's upward appreciation.