While the second Fed rate cut in a month–announced Wednesday afternoon–wasn’t a huge surprise to the financial community, the thought process behind it was: The Fed’s scared, and that doesn’t offer much comfort to those worried about an impending recession.

The new cut brought the benchmark Federal funds rate down by half a point to 3 percent and followed an emergency reduction eight days ago, which lowered the benchmark interest rate
by three-quarters of a percentage point.

Wall Street had widely expected the reduction–stocks ended the day Tuesday "sharply higher" because of anticipation that the Fed would offer an interest-rate cut of at least half a percentage point today, according to Forbes.com–but still reacted strongly to the new. Stocks rose within minutes of the announcement.

Why? Well, the economy stinks–according to news this week from Washington that included the lowest new home sales rate since 1995 in December and a ridiculously slow growth rate (which plummeted from a 4.9 percent pace to an annual rate of 0.6 percent in the fourth quarter), thanks in part to a 24 percent drop in homebuilding that was responsible for pulling 1.2 percentage points off growth.

That big building decline was the eighth consecutive one for residential construction–and the biggest drop since 1981, which is, coincidentally, the last decade in which the Fed went on a rate-cutting spree. All summer, the Fed maintained that inflation was much more of a concern than housing for the overall economy–now, it’s singing a different tune.

The Fed said today it "expects inflation to moderate in coming quarters," and although it will continue to monitor "inflation developments," cited the "deepening of the housing contraction" as a major concern.

Pick up any newspaper or read an article online and it’s clear much of the financial industry agrees. It’s never a good sign when reports are comparing current data to data from the Great Depression; and the Fed hasn’t cut rates this fast since I had a perm.

The government clearly has had a reality check in the last month: They’re proposing all kinds of ways to revive our sagging economy. The House approved President Bush’s stimulus plan today–if the Senate follows suit, cash rebates will soon be making their way to our mailboxes and, Bush hopes, will boost consumer spending. The Fed said its back-to-back January cuts were designed to promote steady growth in the coming months.

But the true effect of both measures remains to be seen. Was the Fed a little late to the game in recognizing the harmful effect the housing decline was having on the economy? And will offering two rate cuts in a month really safeguard the U.S. economy against the recession and speed up growth?

Post your opinion and let us know what you think about the Fed’s move.

Baby boomers are embracing fractional ownership of vacation properties; but this isn’t your mother’s timeshare (even if it is).

Instead of buying a place they’ll only use a few weeks a year, an increasing number of homeowners are opting to buy into a destination or resort club, vacation condo or other partial ownership property. And it’s created a unique second-home market.

According to the U.S. Federal Trade Commission, there are two basic kinds of vacation ownership: timeshares and vacation interval plans. Both require an initial purchase payment and ongoing maintenance fees.

In a timeshare–a unit which you own for the number of years stipulated in the purchase contract or until you sell it–your interest is considered real property. You can rent, sell, exchange or will your unit. Along with other timeshare owners, you own the resort it exists in.

However, in a vacation interval property, a developer owns the resort. You purchase the right to use its condos or units for a specific time period, such as a number of weeks a year, or for the equivalent of a number of points. Vacation interval plans also can include fractional ownership, in which
you purchase a large chunk of vacation ownership time, usually 26 weeks
or less, and biennial, which lets you use a resort every other year.

The contracts often don’t last forever; usually they’re good for between 10 and 50 years. But, perhaps most importantly, the interest you own is legally regarded as personal property.

To the low-maintenance vacationer, that may sound great. However, purchasing a portion of a vacation home has its risks–as well as its rewards.

How do you know if it’s right for you? A few questions to ask before you buy:

• How much will you use the property–and when? Fractional ownership deals are great for people who only plan to use a property for a couple of weeks a year; but take note, the spontaneous vacation isn’t really an option. Hot locations often require booking way ahead of time; most companies won’t guarantee even less-popular spots will be open for last-minute trips.

• What kind of long-term investment are you looking for? When a fractional ownership company sells an item you co-own, you’ll get a cut–if any applies–and can still retain ownership, according to Fox Business. But the Federal Trade Commission cautions homeowners to view the properties as vacation destinations,  and not just as investments, because, as in any real estate purchase, the principle of supply and demand applies–and the sheer number of available destination and fractional ownership options can reduce resale price.

• Is the company you’re considering buying from legit? Aside from the obvious real estate scam concerns, you want to make sure your fractional or other ownership provider is a smooth operator. New companies don’t have proven maintenance records, and you run the risk of finding out scheduling and upkeep aren’t as stellar as you’d like.

If the company checks out and the program fits your vacation needs, fractional ownership may be a way to take on a second property without many of the typical homeowner headaches.

And, if not, don’t let the market scare you from buying a second home or vacation condo. Hot destinations and beachfront areas are always going to have a limited supply of land.

Thus, even though the market may be dipping now, vacation properties will always retain some value–for you, and for people who might want to buy and rent them. We may be in a slowing economy, but that doesn’t mean anyone wants to skip their annual time away.

Vacations may be within the U.S. and possibly more local this year, according to a recent Conference Board consumer survey, but we’re still goin’ on them. The survey found 45.8 percent of Americans plan to take a vacation within six months–that’s only down slightly from last year, which showed 46.4 percent were ready to hit the road.

Given that we’re rumored to be sliding into a recession and are facing higher food, gas and energy prices–oh, and a percentage of Americans are so in debt they’re losing their homes–that number is surprisingly high.

But it illustrates one key principle to keep in mind when considering buying a vacation home: They can decline economic growth, but they can’t take away our Disneyworld. So invest away.

After days of debate, House leaders and the Bush administration announced a pending economic stimulus plan Thursday–but it may not be what the residential industry was hoping for.

Speaker Nancy Pelosi and Treasury Secretary Henry M. Paulson Jr. were two of the parties who announced the plan at a Washington, D.C. news conference today; briefly, some of the high points are:

• The $150 billion package, said to be aimed at the middle class, allows for stipends of $300 to $1,200 per family and provides tax
  incentives for businesses to encourage spending.

• About two-thirds of the total package would go
  toward the consumer rebates; one-third would be earmarked for business
  tax breaks like equipment purchase write-offs, the New York Times says.

• Roughly 117 million families could receive the rebates, according to an estimate from Democrats.

• The plan also includes a little jumbo loan help, thanks to a provision to allow Fannie Mae
  and Freddie Mac to
  temporarily buy mortgages of up to $625,000, surpassing a $417,000
  federal limit, which will allow Fannie Mae and Freddie
  Mac to increase financing for homebuyers who want to buy higher-value homes.   
         

At first glance, the thought of free money is likely to make anyone cheer; but for the troubled housing industry–struggling through its second year of the slump, which the National Association of Realtors said today would continue through the first and possibly second quarter at least of 2008–the package will only provide limited relief.

True, extra cash may translate into extra spending, which could boost the overall economy, which could cause the creation of new jobs, which could prompt relocation and higher incomes, which could increase the need for housing.

But extra cash could also just prompt tapped-out Americans to pay off some of their massive outstanding debt–total consumer credit hit a new high of $2.49 trillion in October, according to the Fed–or treat themselves to a vacation, piece of jewelry, car repair–who knows? It’s a long, bumpy road to increasing housing demand, and $300 might just not get us very far along.

That said, the plan does contain one interesting caveat that might offer some relief to the residential building community.

During the debate over the plan’s specifics, the Democrats’ request to extend unemployment benefits was shot down;
which is unfortunate, since, according to Democratic Senator Max Baucus, fewer than 4 in 10 unemployed U.S. workers receive unemployment benefits.

However, in exchange for cutting the extension and vetoing additional food stamp
programs, the Bush administration and Republicans brokering the deal
agreed to pay the $300 stipend to all workers who earned $3,000 or more
in 2007–even those who didn’t make enough to pay taxes.

Workers who
did pay taxes can earn more and families may get $300 per child (up to
$1,200). Individuals earning more than $75,000 wouldn’t receive the
rebate.

That could provide some much-needed capital for builders who were experiencing their worst year ever due to the housing slump–especially part-timers like contractors and project specialists.

But the tax breaks the plan offers seem less exciting. Giving a tax break for buying new equipment or doing other things to grow a business to an industry that’s seen need drastically decrease in the past year (many homebuilders, such as Lennar Homes, who reported a 49 percent fourth quarter drop in home deliveries, are still suffering) is like giving a cat a laptop–sure, gifts are nice, but they really don’t have any use for it.

The tax break will probably help other industries and, in turn, flood more money into the economy, but it’s disappointing that the plan didn’t include any special provisions to help invigorate our industry. (Not counting giving the jumbo loan market a kick. That may help move some homes, but–as the foreclosure rate rises because previous loan programs pushed homebuyers into properties they couldn’t afford–the jumbo market doesn’t really seem like the best place to focus, does it?)

What do you think about the proposed plan? If it passes next month, will it help your business–or your family? What actions do you wish the government would add? Share your reactions by posting them here on the MHN blog.

In a surprise move today, the Federal Reserve cut the benchmark interest rate by three quarters of a percentage point–the largest single
reduction since the Fed began using the rate as the main
monetary policy tool about 18 years ago, according to Bloomberg.

The Fed Board of Governors also approved a 75-basis-point decrease in the discount rate today, bringing it to 4 percent. 

The target overnight lending rate dropped to
3.5 percent from 4.25 percent. Although a rate cut was widely anticipated this month, the Fed wasn’t scheduled to meet until next week–and hardly anyone expected one this big. The Fed hasn’t given an emergency cut since 2001.

What gives? A little bit of panic, for the most part.

"Broader financial market conditions have continued to
deteriorate and credit has tightened further for some businesses
and households,” the Fed said in a statement in Washington. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

Did it ever.

The subprime fallout continues to affect the U.S. housing market and residential sectors in the U.K. and other companies; building companies (isn’t that right, Wolseley) and financial systems around the world. Reports Tuesday indicated China’s state-owned banks may announce U.S. mortgage fallout damage soon.

Thus, the Fed was willing to–for now–forget inflation (previously
given as the reason the Fed didn’t cut rates until September) because
of the recent poor retail, unemployment and stock market news.

But the timing–well, that was a surprise.  Coming just a week after President Bush announced plans to create an economic stimulus package–which, still under formation, has been met with questioning from critics who feel it won’t help in the long term–the Fed announcement conveyed a sense of urgency the central bank has yet to express about the status of the economy. Sitting tight is a thing of the past for the Fed, it seems.

I got off a plane today to find I had a message from a mortgage broker I’d talked to months ago while pricing refinancing options–excited about the rate cut, he called to see if I’d gone through with the refi with someone else or if I would be interested in talking about my options.

It’s been a couple of months since I touched base with him. I’m not sure if his call indicates how truly big the new is (no other brokers called me after previous cuts this year) or if the broker digging out old client leads and calling me after two months indicates that the Fed’s right–things really have slowed down enough to warrant a huge cut.

Will the rate cut give our economy the boost it so desperately needs to prevent a recession? Or will it provide an all-too-temporary shot in the arm, as many of the Bush plan opponents fear?

Speak out! What do you think will reinvigorate the economy? Post your thoughts below.

It’s a new year, which always prompts reflection about the year before–which may explain the recent abundance of "state of the housing market" news articles.

While some contain things we’ve heard before–the industry is down, the end of the slump is unclear–a few articles paint an interesting picture of the housing decline’s status–and the echo effect it’s having on other parts of the economy.

Two notable picks:

• From Mortgages to Other Meltdowns: The focus on the U.S. mortgage industry’s questionable lending standards–which secured loans for many homeowners who couldn’t afford them–prompted industry-wide reform last year; and now, according to an article from Reuters, could shine a spotlight on standards used to secure car loans, student loans and  credit cards, which many feel will be the next industry to crumble.

Our take: Credit cards aren’t completely unlike mortgages. Without accurate measures to judge factors like income, risk can’t be assessed in either industry, Reuters says–and that’s a good point. We’re an overspending society–the average household had $6,600 in credit card debt in 2007, according to CardTrak.com–but overextending expenses is what nailed many of the defaulting and already foreclosed-upon homeowners after the housing boom.

Both American Express and Capital One last week posted lower-than-expected quarterly profits, but–as the economy weakens–it seems those days are over for credit card companies. The Federal Reserve reported that consumer credit grew at an annual rate of 7.5 percent in November; an Associated Press poll in December showed that credit card delinquencies had jumped 26 percent from 2006, according to NPR. Could Americans be spiraling into irreversible credit card debt? If so, we’re likely to be asking later this year why they were given enough credit to do so.

• Who Can Buy Homes, and Who Can Let Them: A separate article in The New York Times discusses the changing identity of the U.S. homeowner–one that favors young first-time buyers with nothing to pay off or unload before trading up.

The article also suggests banks–many of which stumbled in 2007 and already this year due to subprime issues–are in danger as home values drop further, causing them additional losses and eventually reducing the amount of loans that can be offered to potential homebuyers.

Our take: Regional banks had fared well during the slump, offering homebuyers more flexible lending standards because their loans are funded with customer deposits rather than capital markets,  like big banks, who had tightened lending practices.

However, a major regional bank index released Thursday showed that may no longer be the case. The KBW Regional Banking Index, compiled by New York-based financial services company Keefe, Bruyette & Woods, fell 3.1 percent to 66.80.

That’s likely to make the lending market even tighter–which means less loans, less home purchases, less need for new housing and, in turn, less construction. Which would imply that the state of the industry is pretty much where it’s been–or, given the increased credit card debt we’re mixing with housing debt, are we actually worse off?