Personal Finance Advice

The report released by the National Association of Realtors was the first bit of good news the housing market has seen in some time.  Home sales rose for the first time in seven months in the month of February.  Home prices are still falling though, which is a cause for concern.  The median sales price is down 8.2% from a year ago.

While this gives a glimpse that the housing market may soon be bottoming out, it doesn’t mean that sub prime crisis is over yet by a long shot.  All this really does at the moment is give the stock market a reason to rally for another day until the next bit of bad news comes along.

The problems with the banking sector are still there.  Only a week removed from the near bankruptcy of Bear Stearns, the financial sector is still gripped in a major credit crisis.

Many homeowners are still stuck with unwieldy mortgages that are worth more than the price of their homes, so the foreclosure risk remains.  So far, write downs from the sub prime collapse are estimated around $200 billion but many experts are predicting that figure could rise to as high as $500 billion before all is said and done.

While it appears that the Fed is willing to use any tool necessary to instill liquidity in the market, the fact remains that banks have tightened their lending standards considerably.  While the Fed has been slashing interest rates left and right, mortgage rates still remain abnormally high.

So while the slump in the housing market has caused the current troubles in the financial markets, it’s looking more and more likely that the financial markets will constrain a possible rebound in the housing market.

The current global credit crisis has forced the Fed to take broad action in an attempt to cure the malaise that has infected the entire banking system. The situation has become so bad that they truly have become the “lender of last resort”.

With financial institutions growing increasingly unwilling to loan to each other as credit conditions worsen, the Fed has had to step in and open up it’s lending window to more and more non-traditional banks. They have also decided to lower the interest rates to match what they charge regular commercial banks.

As well as expanding it’s lending facilities and increasing the maturity duration, the Fed has also agreed to take on a broader range of assets as collateral. The most important may be it’s decision to accept mortgage backed securities in an effort to provide liquidity in a market that for most part no longer exists.

Earlier this week it agreed to provide $30 billion in financing for JPMorgan’s takeover bid of the nearly collapsed Bear Stearns at $2 a share, agreeing to accept as collateral some of Bear’s least liquid assets. The Fed hasn’t had to provide credit to a securities firm in such a way since the Great Depression.

With the prospect of a prolonged economic downturn ahead, it is vitally important that the financial system is stabilized. The housing slump may be the root of the current economic troubles but no such recovery in that market can start until the credit starts to flow freely again.

For the second time in two weeks the stock market rallied for it largest gain in five years.  The Dow Jones surged 420 point for it’s fourth largest gain ever as blue chip financials lead the charge.

The Fed cut the benchmark fed funds rate by 75 basis points to 2.25%, it’s lowest level since December of 2004.  Over the weekend the Fed announced an emergency rate cut of 25 basis points to 3.25% in it’s lending rate to financial institutions.  It also opened up a new lending facility for securities firms and increased the term of it’s loans from 30 days to 90 days.

While it was less than what the market had been expecting it couldn’t put a damper on the relief much of Wall Street felt after Goldman Sachs and Lehman Brothers both released quarterly earnings statements that beat analyst’s estimates.  Both companies rebounded sharply on Tuesday after taking big hits to their stock values when investors began a general selloff of financial stocks after the fire sale of Bear Sterns  to JPMorgan was announced on Monday.  There was a growing fear for many investors of an imminent collapse of the other investment banks.

The companies reassured investors of their strong capital positions and that they would not meet the same fate as their rival Bear Stearns when it ran out of cash and was unable to meet it’s margin calls.  The estimated cash and short term assets for Goldman and Lehman were at $60 billion and $90 billion respectively.

While a strong rally when a rate cut is announced is nothing new, it will be interesting to see if the market will be able to maintain it’s momentum.  The effect of the rate cut on exchange rates and commodity prices may start to erode those gains in the upcoming days.