Tuesday, September 18, 2007

Law of Unintended Consequences

The Fed cut interest rates today on the short end of the curve.

This will more than likely help borrowers in adjustable rate mortgages (in the short-term if nothing else).

The yield on the 30 year treasury bond has gone up though. That implies that the rate on 30 year fixed mortgages will also go up.

So, there you sit. You've got an adjustable rate mortgage and you've got to make a decision. Do you stick where you are and hope that inflation really is tame going forward, or do you now lock in a higher rate and be done with it? The Fed didn't make your decision any easier.

Or perhaps you are thinking of buying a new home right now. You've read about the dangers of adjustable rate mortgages in the news (right along with subprime stories). You decide you want a fixed rate. Well, let's hope the Fed's decision today didn't price you out of the market. Fixed rate mortgages, if today is any indicator, seem to be getting more expensive.

You see, there's a lot of housing inventory out there. In order to work it off people need to actually buy the homes. If they are scared of adjustable rates and they can't afford the fixed rates, then what are they going to do? I'd suggest they might just watch the carnage, just like I am. But what do I know?

I can say inflation is never free. Somebody has to pay for it. Based on the price of oil, I'd say we'll eventually be paying for it in one form or another. The days of free lunches are coming to an end.

The stock market loves a rate cut and especially loves a bonus surpise. Let's just hope it isn't followed by what this chart might imply (or I'd need to add another skier).

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