Prime Rate

also known as the Fed, National or United States Prime Rate,
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Thursday, October 26, 2006

Odds On A Rate Hike for January 31 Drop to 4% On New Home Sales Report

Planning on buying a new home? Well, in many regions across the U.S., it's a buyer's market right now. Mortgage rates are still low, inventories are high, and home prices are falling.

Today, the Commerce Department released the September New Homes Sales report. 1,075,000 new homes were sold last month; compare that to the September, 2005 figure: 1,253,000. More significantly, the median price on a new home last month was $217,100; compare that to the revised September, 2005 figure: $240,400.

Yup: it's a buyer's market all right. But how long will it last? Well, not that long, if I'm reading comments made by former Fed boss Alan Greenspan correctly. In a recent interview with economist Sherry Cooper up in Canada, Greenspan said:

"...I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. There is a good chance of coming out of this in good shape, but average house prices are likely to be down this year relative to 2005. I don't know, but I think the worst of this may well be over..."

Or maybe Dr. Greenspan is being too optimistic about the housing correction, and the housing sector will continue to decline well into 2007. Some economists are predicting that the housing sector will continue on a downward trend for another 6 to 12 months before bottoming out. Only time will tell.


The Latest Odds

As you might have guessed, investors have reacted to today's housing news. As of right now, the folks who trade in Fed Funds Futures have odds at around 4% (according to current pricing on contracts) that the Federal Open Market Committee (FOMC) will elect to raise the benchmark Fed Funds Target Rate by 25 basis points at the January 31ST, 2007 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:
  • In all likelihood, the Prime Rate will remain at the current 8.25% after the December 12TH FOMC monetary policy meeting.
  • Current odds that the Prime Rate will rise
    to 8.50% on January 31ST, 2007: 4% (very unlikely)

  • NB: Prime Rate = (The Fed Funds Target Rate + 3)

The odds related to Fed Funds Futures contracts--widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate--are continually changing, so stay tuned to this blog for the latest odds. Odds may experience a significant shift on November 14TH, after the Fed releases the minutes from yesterday's monetary policy meeting.

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