February 14th marked the 8th annual Cure Finders Valentine's Dinner and Dance to help fund research for Cystic Fibrosis. The past few years, Brooke and I have been volunteers to the dance and charity event located at the Convention Center next to the Music Road Hotel in Pigeon Forge. Each year it has been a positive experience seeing our local community get together and help donate funds for the research of Cystic Fibrosis. It is dear to our hearts as Brooke's boss at the City of Sevierville, Jim Deanda, has two kids (Callie and Cale) with Cystic Fibrosis.
This year, I had two clients to work with on Valentine's Day and the day of the event, so I was a bit worried how I was going to fit it all into my schedule. I met with one client at 8:00 am which is pretty early to show property around here - the rental office at Sherwood Forest Resort where I was to show him a couple cabins was closed, but luckily there was someone there early that gave us access to the gated community. Once I had finished with the first client at around 11:00 I had another couple to show cabins. After looking at several cabins in various communities I was then able to head over and change into my suit to attend the dinner/dance. Brooke had been there since noon help setting up for the event, so I felt bad not being able to assist with setup, but glad to make it nonetheless.
The event was attended by several groups, businesses, and individuals in our area - including our local US Congressman, Phil Roe as well as local Senators. I distinctly remember meeting Congressman David Davis in previous years of the event, so apparently it has become a tradition of our representatives to attend the function.
Being Valentine's Day, Brooke and I had decided our exchange of gifts this year would be to bid on a silent auction item that we thought each other would like. We ended up winning a couple auction items that went to help fund additional research to Cystic Fibrosis. She ended up getting a pair of sterling silver black onyx earrings and she won a Robert Tino painting of Lady Vols coach Pat Summitt autographed by both for me! I tried to make up for me arriving late by helping disassemble things for the event - we ended up leaving at about 1:30 am!
Gary Woods Photography is a regular at the event and is kind enough to donate his time and skill to taking photos of people at the event and mailing them to the attendees. Last year the photo of Brooke and I turned out great and we look forward to ours again this year!
It was great to see even in these difficult economic times people extending a hand to help such an important cause! We will definitely be back next year for the 9th annual event and I encourage anyone else able to make it to attend as well! The Cure Finders Cystic Fibrosis Foundation also holds a sporting clays tournament along with a motorcycle ride sponsored by Harley-Davidson each year as well, so make sure not to miss those events either!
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A lot of my clients are not initially aware of the differences and advantages/disadvantages when comparing short sales versus foreclosures. This blog will be an attempt to explain in detail how the process works and the benefits and hassles associated with each. First I will describe and somewhat define both a short sale and then I will go in-depth about the disadvantages and advantages of each when purchasing a property.
Foreclosures
A foreclosure is a property that is already owned by a bank. Typically a foreclosure is obtained by the bank when the past owner is in default and has not been making their payments. The bank files a "Notice of Default" and an auction date is set for the property to be auctioned off (in our case at the Sevier County Courthouse steps). In most cases the lending institution (holder of the mortgage note) ends up bidding and winning the property at the auction for the amount of the existing mortgage or close to the amount. There are exceptions to this scenario such as when the original owner in default had a large down payment or a substantial equity position in the property. In this scenario other bidders may take interest and bid against the bank. Once a property is acquired by a bank they typically hire an "asset manager" to deal with the sale of the property and obtaining a "Broker Price Opinion" or BPO which is basically an appraisal of the property value. The asset manager then selects a Realtor to market the property and offer it up for sale in the MLS. Large banks typically handle foreclosures in this manner. Most of the smaller, local banks skip the process of hiring an asset manager and list the property with a Realtor direct.
Short Sales
Short sales are more difficult to explain in a clear cohesive manner. A short sale occurs when the property owner is facing difficulties making their payments on the property. This could be due to a variety of reasons. The cabin may not be generating enough rental income, they could be facing financial difficulties, lost their job, facing health concerns, or any other reason they are not capable of continuing payments of their mortgage. A short sale boils down to the current owner is having difficulty making their payments, the price they could obtain for the property is less than the existing mortgage, and they are not capable of making up the difference (bringing money to closing). An owner of a home then consults with their lender, provides them detailed documents about their financial situation and the lender then decides if the property is eligible for a short sale. Sometimes, a lender will reject a short sale opportunity if an owner cannot show "financial hardship". If an owner has substantial assets and can afford to either make payments on the loan or has the funds to make up the difference between the estimated selling price and the existing mortgage the lender will usually not accept the short sale scenario. Most often in this area with overnight cabin rentals this is not the case as many cabins have been going into a "short sale status" or deed in lieu of foreclosure.
A short sale can get very tricky when there is more than one mortgage on the property (by different lenders). The reason is that a short sale requires the cooperation of all lenders involved with the property. The first or senior lender has little reason to offer any of the proceeds to a junior lender (the second mortage holder), since all junior liens will be cleared if the senior lender forecloses. Therefore, the senior lender typically requires that it receive all of the net proceeds of sale or that the junior lienholder be paid only a token amount. If the senior loan has been securitized, the loan securitization agreement can prohibit the loan servicer from negotiating in this situation. However, if the junior lienholder will receive nothing from a short sale, it has no incentive to cooperate.
A short sale is advantageous to an owner because it would not have a foreclosure on their credit, but their credit is usually damaged substantially (80 to 100 points off the FICO score approximately for a short sale vs. 200+ for a foreclosure) by this point anyway. From a bank's perspective it has a couple advantages. The cost associated with processing and going through a foreclosure is quite high for a bank with legal fees, filing, and things of that nature. Also, when the lender is in possession of the property they are responsible for its upkeep, taxes, HOA fees, and utilities (if they are turned on). So, a short sale has certain advantages to each side of the equation when considering the current owner and the lender. A seller especially as a vacation home or investment property must be careful about the tax ramifications with a short sale based on the "cancellation of debt income" (COD). Depending upon several different circumstances such as if the loan is a recourse or non-recourse loan the owner may take on tax liability for the "capital gain" of the cancellation of debt. The 2007 Mortgage Forgiveness Debt Relief Act of 2007 removed all liability on any debt forgiven on a personal residence, but not a vacation property/investment property.
A short sale is usually, but not always, listed within the MLS. Frequently the listing agents of these properties are random in nature - as they are decided by the seller/owner of the property, not an asset management company that deals with foreclosures and has a few selected Realtors to market the property. Sometimes a property can be a normal listing and then change to a short sale status if an owner's financial position deteriorates. It is possible for an owner to list a property originally and have it classified as a short sale, but it is less common in our market. Usually an owner will "test the waters' for a while to see if they can obtain a higher price for their property and after learning they cannot, go into a short sale status and begin lowering the price.
Now to the advantages and disadvantages to each from a buyer's perspective. This information is based on experience and my perception of how each works. Each individual may perceive certain things to their advantage while others may see it as a disadvantage.
Foreclosures - Advantages
With a foreclosure you can receive a fairly quick response on your offer. While it may take a little longer than a normal real estate transaction to get a response, it is within a short manageable time. Usually two or three days is the time it takes for a bank to respond to an offer - whether it be to counter the offer, accept the offer, or reject it without a response. I have had situations where my clients have made offers and it only took one day to get a response, but two days is most common from my experience.
Prices on foreclosures are without a doubt lower than the average property on the market. Sometimes they are aggressively priced from the start, while at times they are somewhat competitively priced and come down in price once the market establishes the price is too high. This is dependent most on the BPO the asset management company receives and the recommendations from the listing agent. Some tend to list the property very competitively at the beginning while others hold out for a higher price and lower it over time. It is very important to look at other foreclosures in the development or comparable foreclosure properties (whether they be sold or currently on the market) and determine if the price has some room to decline in price further or if it is competitively priced currently. Foreclosures can be purchased at higher or lower prices that short sales, it just depends on the particular cabin.
Some foreclosures may help with closing costs. This is typical only of a couple companies such as "Homesteps" and other government agencies such as Fannie Mae and Freddie Mac.
Foreclosures - Disadvantages
There are a few disadvantages to purchasing a property as a foreclosure compared to a short sale. Usually a cabin is not furnished if it is a foreclosure. There are exceptions to this though and it varies on a case by case basis. Rental history of the particular cabin is not available on a foreclosure cabin through the owner (lender) so it is more difficult to analyze the rental potential and do a financial analysis of the property. There are other means to obtain this information and while it may not be exact and as detailed as the information you can obtain in a short sale it is still valuable nonetheless. You can contact the past rental management company and they MAY provide you with an indication of how the property has performed on their rental program. If it has fared well, they will usually be happy to give you an idea that it did well because they want you to place the cabin back under their management so it can generate income. Also, I have access to the past listings in the MLS if it has sold recently or been on the market and expired. Sometimes the listing agent will provide the rental information on the MLS sheet and I can retrieve the information.
The bank/lender of a foreclosed property will make no repairs and it is sold "as-is". This does not keep you from getting a home inspection to determine a home's faults and things needing to be repaired. But once you have a home inspection do not expect the bank to remedy any of the problems. The home inspection in a foreclosure is just a discovery process where you find the faults with the home and if they are not substantial then you move forward and if they are difficult to overcome or substantial problems then you have the option of getting out of the contract and having your earnest money deposit returned.
Short Sale Advantages
Short sales, like foreclosures can be obtained for some incredibly good values - at times 60% to 70% of the existing mortgage or what the current owner paid or less. A short sale will typicallly have its furniture until the near end and they are very close to facing foreclosure. In a short sale furniture is typically included or at least negotiable in a contract. Short sales, since they are still owned by someone usually renting out the property will be able to give a past rental history for the property so you can get the past performance of the cabin and an indication of the type of income it will generate in the future. Also, sometimes on a short sale property the owner will agree to make some repairs in order to "save" the sale after a home inspection. This is not always the case, and they will usually not pay for big ticket items, but something is better than nothing which is what you nearly always get as far as remedies by the banks with foreclosures. Sometimes, in both foreclosures and short sales prices can be lowered after finding something substantially wrong in a home inspection, but the owner typically will not take on the responsibility for doing substantial repairs themselves.
Short Sale Disadvantages
The disadvantages of a short sale is probably the most prominent of all the differences between a short sale and foreclosure. In a short sale you will normally end up waiting a VERY long time before getting third party approval from the lender. The current owner may sign the contract in short order, but it will be contingent upon the lender approving the conditions of the sale (whether it be price, contingencies, etc.). I have had my clients have to wait anywhere from 45 days to over 3 months to obtain a final third party (lender) approval of a short sale. The problems associated with this are while the bank has your offer in hand they are slowly processing things such as obtaining an appraisal, receiving financial documents from the owner, and various other things. During this time of waiting, the bank likes to have other offers presented so they can decide which offer is in their best interests. It is not uncommon for a short sale to have several offers and you will not know if yours has been accepted for months. This is a very frustrating process for a buyer. While not knowing if your offer has been officially accepted is frustrating and takes patience, it is normally not as vital in the cabin investment market than if you were purchasing a property as your permanent residence and had to schedule moving, furniture, etc.
It is not only frustrating from a buyer's perspective, but mine as well. Once a seller signs the contract it is out of my hands. I can do very little if anything to speed up the process when representing a buyer or make the other side work faster. Patience is vitally important when dealing with a short sale, but usually pays off with an exceptional deal if the bank accepts your offer.
Sometimes you will not know if the deal is finalized until a couple days to closing - and the closing date is a moving target. In my opinion, the best way to approach a short sale is to assume there will be no other offers and make your highest and best offer at the start. In a short sale situation they will very rarely if ever present a counter offer. It is also important to not let your emotions take control and offer too much. Make a decision based on what the value of the property is after doing research, not what you think other people may be offering on the property (if there is substantial activity and other offers). Sometimes it can almost get into a situation like a bidding war if the cabin is in an ideal location and priced very competitively - this is not an ideal situation to be in usually as emotions get involved.
In a short sale situation the negotiator and bank will be working on one side with the offers presented, but commonly they are not working in cohesion and having contact with the side of the lender dealing with the potential foreclosure proceedings. It is not uncommon to have a property have foreclosure proceeding processed and have a date for an auction at the courthouse steps, while at the same time an offer may be existing as a short sale property. Frequently, it seems, one side of the bank is not aware of what the other side is doing. So you may have an offer existing, only to find the lender has ended up foreclosing on the property and it being auctioned off at that courthouse.
To summarize, patience is the most important thing when dealing with a short sale because it can take a few months to close on the property. I have seen some incredible deals on short sales and obtained some excellent bargains for my clients, so it can be well worth the wait. If I had my choice and was buying a property though, I would be more apt to purchase a foreclosure rather than a short sale, which I personally have.
Short Sale Versus Foreclosure Summary
The real estate market in Sevier County has unquestionably been impacted by foreclosures and short sales of cabins. A large portion of the cabin sales, approximately 40%, have been either foreclosures or short sales. Among these foreclosures many were purchased at what I would consider bargains and some others were more along the lines of a typical selling price. It is vitally important to ensure the cabin is appropriately priced for a foreclosure before making an offer. I have seen some foreclosure cabins that are priced no more competitive than regular sales, yet have sold quickly on the market. I think part of this is attributed to when someone sees "foreclosure" they automatically assume it is a good deal. While this is often the case, it is not necessarily always true.
The majority of foreclosures are centered in a few developments. Notably, those that were developed in the 2005 to 2007 time frame when the "building boom" was happening in Sevier County. Prior to 2005 the number of cabins in the area was not sufficient to accomodate the numbers of visitors to the area and people looking to rent a cabin. When 2005 rolled around and several large developments were created the supply versus demand changed and did a 180 degree turn. Each of these developments had somewhere between 100 and 400 cabins and these cabins ended up stealing away much of the market share of visitors. They were after all, new and had the amenities and lavish furnishings that visitors desire. This caused the older cabins to see a dramatic drop in their rental revenues. While many of the owners of the new cabins did in fact see good rental histories, they also paid outrageously high prices for the cabins and made it difficult to sustain a positive cash flow. Especially considering the utility costs, taxes, home owners insurance, and HOA fees within the development.
The developments with the largest number of foreclosures and short sales are listed below. Most of these all have a common denominator of being developed in the 2005 to 2007 time frame and are PUD's (Planned Unit Developments) with the cabins "stacked on top of each other". The exceptions to this rule are Sky Harbor and Chalet Village. Both of these developments are experiencing a high rate of foreclosure. This can be attributed to them both being older developments with some properties that are dated and not producing the same level of income they once generated. Also, they are both massive in size with over 1,000 lots each, so there are going to be foreclosures in the developments even in good times. For the most part, both developments feature entry level cabins where some smaller investors/owners "dipped their toes in the water" and ended up finding the water was much deeper than they thought and could handle.
Developments in the Smoky Mountains with the most Foreclosures
While there are several other developments that have foreclosures, they are more of a case by case basis. The most difficult type of foreclosure to find is a cabin located on acreage that has been foreclosed. They are in high demand and there is very little selection of quality cabins on acreage within our MLS, let alone foreclosure cabins.
Prices of foreclosures are typically around 60% to 70% of the original selling price of a cabin. This can vary dramatically depending on the development and how hard it has been hit by foreclosures and how much the owners "overpaid" for the cabins in the first place. For example, I just sold to one of my clients a 6 bedroom, 6.5 bath foreclosure cabin in Black Bear Ridge Resort for $295,000 that originally sold for $760,000. The original selling price included furniture, while the $295,000 did not, but still it was purchased at 38.8% of the original selling price and approximately $63 per square foot! With these numbers there is no doubt in my mind they will be receiving a good positive cash flow.
Other properties have come up in the market that are unquestionably good deals. For instance, there was a cabin in Sherwood Forest Resort that originally sold for $370,000 (furnished) that had a listing price of $129,900. This cabin was originally listed at $189,900 and once the listing agent had the large $60,000 price drop it immediately received a lot of activity and multiple offers. The cabin is 1,560 square feet with 2 bedrooms and 2 baths with a spectacular view of the Smoky Mountains. Comparable properties in the development have gross rental incomes of between $35,000 and $40,000 conservatively. The amenities of the development are attractive to visitors - with the gated entry, community swimming pool, large conference center/lodge, and absolutely stunning mountain views.
It is a good opportunity now for investors to purchase certain foreclosed cabins in the area. I feel most of the cabin prices still have some adjustment downward because they do not create a positive cash flow. There are definitely properties out there though that perform well and I do my very best to locate those properties. My website has a foreclosure page that I update daily with all of the new foreclosures on the market and price changes of the properties. It is a good resource to use to help identify some of the better priced cabins available. While not all of the cabins listed as foreclosures and short sales are great deals, several are.
Recent land sales in Sevier County have been sluggish to say the least. No matter the area - Gatlinburg, Pigeon Forge, Wears Valley, Sevierville, or any other area of Sevier County sales have been few and far between. There is an abundance of land on the market, but very few buyers willing to pony up the cash to invest in land. Normally this would create a situation where there is a buyers market and driving down prices. Although prices of land within the MLS have lowered, they are nowhere near in proportion to cabin and residential homes.
My speculation for the reasoning behind this stems from cabins becoming low enough priced now to become a wise investment with several cabins offering positive cash flow opportunities with 20% down. With the residential properties there is a need - people have to live somewhere and buyers are bargain shopping. Also, the price of residential homes lowering has made them more lucrative as long-term rentals. Land, on the other hand, offers no monthly income in most cases, so it can be a substantial drain on an individual's cash position as reserves.
At this time, a lot of people are holding cash as the stock markets are faced with turmoil - along with the strengthening of the dollar recently. Although, I do feel the value of the dollar will be decreasing in the future as the Federal Reserve has been utilizing quite a bit of "quantitative easing" and increasing the monetary base. Once the banks utilize (either invest or lend) the money they received from the bailout packages, that money gets turned into the money supply as it gets put into circulation. I believe the long term result from this will be inflation - caused by the over compensation and manipulation of the markets in the current asset and commodity deflation.
So why are the number of land sales so low and why haven't prices of land dropped substantially in the area? That is a difficult question to answer. Without a doubt, those who are actually purchasing land (which is a relatively few number) are searching for bargains from distressed sellers or properties at absolute auctions. For example, I just purchased 5.55 acres of rolling pasture land in New Center for $40,000 at absolute auction. The property was part of the Denison Farm, a 130 acre tract subdivided into 25 parcels. I would estimate if the auction occurred two years ago, the land would have sold for double the price I paid. So, it is not necessarily that prices are not decreasing, however the number of buyers has dropped off the map, and those willing to buy are only purchasing when they are able to find a real bargain.
I do believe that land soared to some overvalued prices in the 2005 to 2007 time frame, so a correction is necessary. The problem currently is that sellers seem to be holding strong on their prices and have not lowered them enough to entice the buyers searching for property. Many owners of land are able to do this as they "wait out the storm", but I would think some people would be forced to lower their prices to free up cash for other ventures, especially those who have substantial equity in the land or have it paid for.
To give you an idea of the market for land I researched the land sales in Sevier County through our GSMAR (Great Smoky Mountains Association of Realtors) over the past 30 days (covering the time frame of November 5th to December 5th. There were a whopping 10 total land sales in Sevier County during this time. Of these sales, nine out of ten were priced at $69,900 or less. There were:
The thing I noticed is the vast majority of these lots are residential building lots instead of land being bought for cabins. Perhaps two of the ten sales were for overnight rental cabins (one in Wears Valley and the lot in Gatlinburg) . In the past, this segment of the market was a much greater proportion. The purchasing of land to build a cabin has lowered dramatically as new cabin builds have been extremely sluggish - and justifiably so.
To give you a point of reference, there are currently 2,186 (Two thousand one hundred and eighty six!) parcels of land within Sevier County currently for sale within the GSMAR. At the rate of 10 sales per month (equating to 120 sales per year) it would take over 18 years to cleanse the market - and that is assuming that no other properties come up for sale which is obviously not going to happen. There has been an over abundance of land for sale compared to the number of sales for a while in Sevier County, but nothing approaching the 18 year figure.
I do find it odd that prices have not been lowered significantly by sellers yet, but I would think it is on the way. Land selling at absolute auction have been going for much less than in the past and developments such as The Summit On Bluff Mountain ran an extraordinary amount of advertising when they slashed their prices substantially (in some cases up to 50% off their original price) at the end of October. I believe it is just a matter of time before many more sellers begin to lower their listing prices to meet the demands of buyers. There are always owners that have their land listed that do not NEED to sell, so they just may sit tight until the market recovers, but not everyone has the luxury of being in that position.
So to summarize, it is a buyers market, but the vast majority of prices of listed properties are still high. While there can be bargains found, many people seem to be waiting for prices to lower and indicators of the economy recovering in order to purchase land for the building of new homes. If you are looking to buy land I would be happy to search out the current bargains or locate distressed sellers who need to sell and have the ability to accept an offer substantially less than their asking price. And there is always the option of just waiting until the land prices lower as I would predict in a lot of circumstances. Property on a creek or river is still in high demand and with so little waterfront property available, I think those properties will hold their value well.
I have been trying to keep as informed as possible regarding the recent economic crisis including the Federal Reserve's monetary policy actions. At times it can be quite confusing. To me it is even more difficult to comprehend the data in a manner to analzye the implications and potential repercussions of their actions. That is until I came across the post of Brian Benton, who summarizes the Federal Reserve's recent actions in a concise and understandable manner. Please take a few minutes to read his post below:
"I have mentioned several times in past weeks that the monetary base is now increasing. You can consider the monetary base to be the bottom most layer of the money supply (the core). It is the base from which banks lend in our fractional reserve system. The monetary base consists of currency in circulation (which is M0), cash held in bank vaults, and cash on deposit with the Federal Reserve as reserves. The Fed obviously has direct power over the monetary base, but only has indirect influence on fractional reserve lending by the banks (and thus the other monetary aggregates). This is why the Fed can "print"/"create" all of the money it wants (assuming that it has an adequate supply of treasuries in the secondary market to buy) and it will not have an impact on inflation if the banks do not put it to use and instead hoard as reserves. Well, this is the problem that the Fed and Treasury are having with the banks. The Fed has funneled all of this new money to the banks (through both lending programs and bailout/injection programs), but the banks are not lending it out as demanded by the Fed and Treasury. They are sitting on it in anticipation of rough times ahead. See http://news.yahoo.com/s/ap/20081028/...ncial_meltdown.
How will we know that the banks have begun lending? We should look at the broader money aggregates, namely M1 and to some extent M2. M1 is M0 (currency in circulation) plus mostly demand deposits and other checkable deposits. Since reserves are not part of the circulating money supply, they are not included in M1. M1 will begin increasing when the banks begin lending in aggregate their now plentiful reserves ... albeit, these are reserves net loaned from the Fed as non-borrowed bank reserves are nearly -$364 billion as of Wednesday 10/24. In last week's Fed H.3 report, the monetary base (not seasonally adjusted) grew to nearly $1.149 trillion, up nearly 14% in just two weeks (see Note: below). This is up 26% since 9/10, approximately when the Fed began its program of quantitative easing. The following chart from the St. Louis Federal Reserve Bank depicts the dramatic rise in the Adjusted Monetary Base (similar to the monetary base cited above, with seasonality factored in) ... http://research.stlouisfed.org/fred2/series/BASE. However, M1 has declined a bit in recent weeks ($1.412 trillion on 10/13 vs. $1.532 trillion on 9/29) and is up only about 3% from 9/8 ($1.368 trillion). Year-over-year, M1 has increased only about 3.5% (using the latest 10/13 figures). The banks are obviously not putting this new money to use in creating new loans and expanding the money supply. The Fed and Treasury are getting desperate as they know that the refusal of banks to lend in aggregate will result in more asset deflation and potentially a deflationary spiral.
How far will the Treasury, Fed, and Executive branch go in encouraging (with force) the banks to lend such that our ever increasing economic problems can be kicked down the road a bit? There are various forms of pressure the Fed can apply to persuade the banks to lend. This could include the Fed/Treasury making an example of a few banks that are not cooperating. This could come in the form of banks being shutout from the bailout funds and/or enhancing rival/competitor banks resulting in takeovers. The Fed could also enact broad measures by draining a specific amount of reserves from the system (while propping up the cooperating banks with targeted funding). These broader measures could be implemented by reversing the quantitative easing program currently being conducted by the Fed. They could also be implemented by the cessation of loan rollovers from the staple Fed lending programs (TAF, TSLF, etc.). This would be yet another example of the Fed/Treasury picking the winners and losers, something that has been a focal point of policy to date.
If the lenders do begin lending again in aggregate off of this vastly expanded monetary base, I think we will likely see serious inflation (monetary and price inflation) and a massive bubble in something (all other things remaining equal, such as the derivatives time bomb). Such a bubble will make the housing bubble seem like child's play. However, if the current deflationary forces win (and bank lending will be a primary indicator), we can fall into a major deflationary spiral. You simply cannot call it at this point and should prepare for both possibilities. I simply keep looking at the numbers for evidence.
As for the Fed cutting the target for the federal funds rate today from 1.5% to 1.0%, this is mostly a non-event. All this did was signal to the market that the Fed will continue the injections of liquidity at the present rate for the intermediate term. The federal funds rate has been trading under 1% for the last two weeks (due to the Fed injecting massive amounts of reserves into the system). So, you will not see any additional liquidity in the system due to a target rate cut today (the target was already being implemented). In fact, the fed funds rate has been effectively trading at the floor set by the rate now paid on excess reserves by the Fed. The rate paid on excess reserves is now 35 basis points (down from 75 basis points) under the target rate for federal funds (this was also a signal that a rate cut was coming). Thus, with a 1.0% target for federal funds, the Fed is now paying banks 0.65% interest on excess reserves on deposit with the Fed. Thus, banks are not going to lend money in the federal funds market for less than they can receive by leaving those reserves on deposit with the Fed. This allows the Fed to engage in quantitative easing (injecting new reserves into the system - expanding the monetary base) without driving interest rates to zero. Allowing the overnight lending rate to fall to 0% did not work out well for Japan.
Note: Bank reserves, averaged throughout last week, increased $20.2 billion to $301.27 billion (this is the number used in the calculation of the monetary base). However, the amount of reserve balances on deposit with the Fed at COB Wednesday 10/22 fell substantially to $220.762 billion (see H.4.1 report). Since the H.3 report calculates the monetary base using an average for reserves, the monetary base number published this week may be a bit inflated when compared to an actual calculation of the monetary base on 10/22."
-Posted by Brian Benton
We shall soon find out if the banks are going to end up lending the cash they are hoarding. Then we will be able to determine the direction our country is headed.
Smoky Mountain Realtor offering real estate services in Gatlinburg, Pigeon Forge, Wears Valley, Sevierville, Bluff Mountain, Cosby, & Pittman Center among others.Smoky Mountain Cabin Rentals available
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