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What Comes Down Must Go Up: Fed Raises Discount Rate By 50%

Bouncing Ball courtesy Kevin Chauvin, Flickr

DON'T WAIT.  CALL YOUR REALTOR NOW!

It had to happen.  The New York Times news alert headline says Federal Reserve Raises Interest Rate Charged to Banks, In First Move Since 2008.

Is it a big deal?  That remains to be seen.  If you locked your loan yesterday, be happy.  The rate you got isn't available today.

An Example From History
(You can't call it a lesson unless something has been learned...)

To put things in perspective, when Jimmy Carter defeated Gerald Ford in 1976, the discount rate stood at 5.25%.  Two years prior, under Nixon, it had been higher, at 8%.  Commodity prices were through the roof.  (Google "oil prices 1973.")  Inflation had taken hold, and the Federal Reserve decided that enough was enough.

The Fed started raising the Discount Rate to combat inflation. 

In four short years, the discount rate rose from 5.25% to a staggering 13.00%.  Remember that the discount rate is the rate banks pay to borrow the money they lend to you. You pay more.

What did that mean to consumers?  I was a homebuilder in the 1980's.  My buyers back then had first mortgages as high as 17%.  (And we still sold new homes at the Jersey Shore.)  Second mortgages were available at 21.5%.

Parallel to today...

Nixon was winding down the Vietnam war, and bringing home the troops.  The NY Times headline on March 29th (the day the last of the US forces were out of Vietnam) was Nixon Sets Meat Price Ceilings at Both Wholesale and Retail; Asserts Costs 'Should Go Down'

Congress was trying to force an outcome on the free market. 

The result was inflation
Rates had to go up to kill the monster, and economic results of the next decade were a template for for our current dilemma.

Moral of the story?

If you intend to finance the purchase of a home, better do it now!  I recommend a 30 year fixed rate.

p.s.  If you intend to qualify for the $8,000 first time homebuyer tax credit or the $6,500 credit, you must be in escrow by April 30. 

Call your REALTOR now.

___________________ 

I'm Mike in Tucson, your preferred Tucson Mortgage Lender.

NMLS #223495

SUNSTREET MORTGAGE llc ~ Mortgage Bankers, Not Brokers!
Offices in Scottsdale, Tucson, and Nogales, AZ, and Albuquerque, NM.

Call me on my Blackberry  (520) 349-9090

photo courtesy Kevin Chauvin, Flickr

 

Comment balloon 85 commentsMike Jones • February 18 2010 07:03PM
What Comes Down Must Go Up: Fed Raises Discount Rate By 50%
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