Fed’s Rate Cut Likely To Increase Number of South Florida Buyers

Don’t be surprised if the number of prospective buyers looking for deals on South Florida real estate spikes in the weeks ahead following the Federal Reserve Board’s interest rate cut.

Out-of-town buyers and local investors were already actively scavenging for opportunities in South Florida’s declining real estate market even before Federal Reserve Board Chairman Ben Bernanke on Tuesday sliced a key interest rate by one-half a percentage point to 4.75 percent. It was the first rate cut since 2003.

Expect savvy buyers to interpret the interest rate cut by the central bank as an indication the time to move could be soon as the federal government will no longer allow the housing market to descend into an unabated freefall. This doesn’t mean the bottom is near or that prices will stabilize, but it does signalize that future housing price declines will likely occur at a slower pace.

Sellers will likely incorrectly read the Fed’s cut to mean that mortgage interest rates are falling, and therefore financing is easier and cheaper to obtain. If this happens, look for sellers to harden their stance on what properties are worth.

Added to that, the region is expected to be inundated with winter tourists from the Northeastern United States and Europe who have been reading about South Florida’s real estate drops, and hoping to buy a condo or two on the cheap.

Locally, Condo Vultures™ LLC is already seeing a strengthening in prices in South Florida, according to a September report.

Properties in the Vultures™ Database (3,200 properties on the market for at least 100 days or that have cut asking prices by 10 percent and/or $100,000) were down 20 percent in August. In July, the average price drop for the Vultures™ Database was 22 percent. Between March and June, the average price drop was 21 percent.

By cutting the federal funds rate by 50 basis points instead of the expected 25 basis points, the Fed is signaling that it intends to be proactive in its efforts to avoid a national recession. Lower interest rates normally prompt consumers and companies to buy and borrow more, creating a ripple effect that can right a wobbly economy.

After the interest rate cut, the the Dow Jones Industrial Average experienced a 335.97-point gain, the largest one-day jump in nearly five years. Depending on the market reacts in upcoming weeks, some industry watchers are already predicting that another rate cut could be possible by the end of the year.

Cutting the Federal Funds Rate reduces the cost that banks pay to borrow money in the short term from the central bank. Banks in turn normally pass the savings on to consumers and companies in the form of lower interest rates on equity lines, auto loans, and credit cards.

Prime, the interest rate offered to well-qualified borrowers, is computed by adding 3 percentage points to the Federal Funds Rate. Prime stands at 7.75 percent today. In real dollars, a 50 basis point cut means a $500 annual savings on interest for every $100,000 borrowed.

With interest rate cuts now a reality, watch for the federal government to broaden its strategy to provide some form of an FDIC-like guarantee for mortgages of primary residences. Remember that an estimated 2 million homes were financed by subprime lenders. If a large percentage of those homes go into foreclosure, the surplus may be even too great for even the Vulture investors to absorb.

A U.S. guarantee on primary residences will probably be necessary to generate enough confidence to prompt investors in the short term to once again buy pooled mortgages on the secondary market. The return of investors would more than likely reverse the current credit crunch, and begin the recovery after a period of stagnation.

Peter Zalewski is a principal with the consulting firm of Condo Vultures™ LLC and a licensed real estate broker with Condo Vultures™ Realty LLC. Peter can be reached at 305-865-5629.

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