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US Fed Holds rates at 5.25%, Housing Market Still in decline.

Posted by Adrian on February 2, 2007

Many thought the US Fed would be a cutting rates into early 2007, including myself. But there is a declining property market in the States, which has yet to reveal it’s ripples and effect on the broader economy. Sub prime loans , which are mortgage loans based for lower income individuals are showing the highest defaults at present. In Australia we have what the National bank called ‘micro loans’ – aimed at lower income individuals, although they do not extend to mortgage based loans. Never the less, lending rates, during the housing boom have been relevantly loose. On February the 6th, the Reserve Bank Of Australia will decide to keep rates unchanged, or increase rates. The bets are on for the RBA to keep rates  unchanged due to a lower CPI – which shows a very slight drop in consumer spending. As opposed to core inflation that is way over the 3% RBA target range.

It will be interesting to see how far the housing market will decline in the US. Will Australia booming housing market also recede? Yes, we are in the decline now.

Quote from Bloomberg article,

“Underwriting standards for sub-prime loans have been too low for at least a year, resulting in loans being issued to borrowers who have little chance of paying them back, Shaughnessy said. That will hurt the insurance companies, pension funds and asset- management firms that are holding some of the U.S.’s $6 trillion of mortgage-backed securities in their portfolios, he said.

“There’s a monster beneath the surface of the financial markets,” Shaughnessy said. “No one knows when or where the credit crisis is going to rear its ugly head.”

Bloomberg article here

CNNmoney article here

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