Fed Rate Action Likely to Have Mixed Impact
Kaufman & Broad Home Corp. estimates that the Federal Reserve’s action Wednesday to push down interest rates will translate into a $500,000 savings in interest costs over the next year for the giant Southern California builder.
But Kaufman & Broad is among the lucky ones. It has a line of credit that fluctuates with changes in key interest rates. The drop in those rates is not likely to bring the same windfall for many other businesses and consumers who either cannot qualify for credit or are locked into paying fixed rates on loans.
This mixed picture leads many economists and financial analysts to question whether the latest interest rate cuts will be sufficient to jump-start the economy.
Bankers nursing sick balance sheets remain skittish about extending credit, while workers worried about their jobs are reluctant to even apply for loans. Meanwhile, many consumers continue to pay double-digit interest rates on credit card, car loans and other types of installment credit that, so far, show little sign of falling.
“The typical (bank) car loan . . . is still close to 11% or 11.5% and that hasn’t changed much in the last couple of years,” said Frank Delacerna, general sales manager of Nick Alexander Imports, a BMW and Volkswagen car dealer in Los Angeles.
In an effort to revive the flagging economic recovery, the Federal Reserve on Wednesday slashed its key discount rate on overnight loans to commercial banks to 4.5% from 5%--the lowest level in 18 years and the fifth such reduction this year. A number of major banks followed by cutting their prime lending rates to 7.5% from 8%.
Some economists believe that if interest rates fall far enough, the economy will eventually bounce back. But even these optimists are surprised how little impact lower interest rates have had so far.
“Lower rates are benefiting many borrowers,” said Ken Ackbarali, senior economist for First Interstate Bank Corp., “and that has to make a difference at some point in the economy. The question, of course, is when.”
Many homeowners and businesses with loans pegged to the prime rate are likely to see a drop soon in interest fees. Many Americans who have adjustable-rate mortgages have seen their monthly payments fall sharply as a result of a yearlong decline in interest rates. And, these homeowners stand to reap further savings from Wednesday’s action.
Other savvy homeowners have rushed in record numbers this year to refinance home loans. But some lenders note that the stampede appears to be leveling off and they question whether the latest decline in rates will have any further dramatic effect.
“The general consensus among my neighbors and business associates is that interest rates have bottomed out,” said Jim Semays, who recently submitted a loan application at Security Pacific Bank to refinance his three bedroom home near Granada Hills. “I’m not going to sit here and wait for the rates to get lower because eventually they will go up.”
Americans are so worried about the economy that even the lowest mortgage rates in 10 years have failed to entice new home buyers. Nationwide, sales of existing homes fell in September to an eight-month low.
“Months ago I had several people call me who said they would get in the market when rates fell. Well, they haven’t called back,” said Pat Rollie, an agent with the real estate firm Bliss Keeler in Pasadena.
“We don’t have a problem of affordability as much as we have a problem of consumer confidence,” said Peter M. Ochs, chairman and CEO of the Fieldstone Group of Cos. a Newport Beach-based home builder.
Banks have been sharply criticized for being slow to lower many interest rates, particularly on credit card accounts and other consumer loans. But, the banks say they are under pressure from federal regulators to maintain healthy balance sheets. Moreover, they are nervous about huge loan losses over the last decade that stemmed from over-aggressive lending to real estate developers, corporate takeover artists and struggling developing nations.
“They can drop the prime rate all they want but unless banks loosen up the purse strings nothing is going to happen,” said Robert S. Solomon, director of tax accounting at Levine, Cooper, Spiegel & Co. “Venture capital is almost nonexistent. I have lots of clients--regular consumers and business people--who can’t get loans.”
Lack of confidence in the economy remains a major obstacle to recovery. Survey after survey has shown consumers reticent to begin spending--and borrowing--again. According to a new Money Magazine/ABC News poll this week, 88% of Americans said that the national economy is in “not so good” or “poor” condition.
But interest rates may finally be reaching the level at which they could trigger more borrowing. For example, some businesses who have been able to find extremely low-rate loans by turning to international markets, are borrowing.
“To us the prime rate no longer represents the true cost of funds anymore; money markets are bigger than U.S. banks today,” said Jim Muth, chief financial officer of the Voit Cos., a Woodland Hills-based real estate developer that recently completed several office buildings near its headquarters with the aid of financing as low as 5.1%.
Muth said his company has loans pegged to a key international index, the London Interbank Offered Rate, which has been dropping faster than the U.S. prime rate. His company pays about 5.1%, far lower than the prime, even at Wednesday’s 7.5%.
