I got my first legitimate comment on my BLOG today. There was another prior comment from a friend and another from a person or website that excerpted one of my posts and plastered a bunch of ad links on the blog page. I thought that this latter comment was somewhat parasitic and not adding any value to the blogosphere so I declined the comment.
But, I’m excited to engage a real reader in a dialog about the LIBOR and the FED Funds Rate. Hey, I’m no expert, but I do read the paper and love to have discussions. The comment was pertaining to my post on Fixed versus Variable rates. I compared the 1 month LIBOR and the FED Funds Rate which are very close to each other to the 30Year Fixed Rate Mortgage. The commenter asked about how the LIBOR and the FED Funds Rate differed since they are certainly close to each other, but not exactly the same.
You can read my response at the Jan 4, 2008 post.
Here are some more detailed charts comparing the 1 month LIBOR and the FED Funds Rate.
So you can see from these charts that there is a difference between the FED Funds Rate and the 1 mo LIBOR, but a minor one. On average the 1 month LIBOR is only 0.2% higher than the FED Funds Rate. It’s small. The LIBOR also lags the FED Funds Rate down and leads it going up.
I look for news that European Banks are concerned about European business conditions and about lending to each other as an indicator that LIBOR will be temporarily higher than the FED Funds Rate. That has happened in recent months, but the LIBOR is now returning to a traditional relationship with the FED Funds Rate. See the projected rates in January 2008.
News that the government and the FED are working out an economic stimulus package to avert a major recession suggests that interest rates will be lowered, not raised to fight inflation. Also despite concerns of losses by financial institutions related to real estate loans going bad, there is money flowing into those firms from overseas investors. (World rides to Wall Street’s Rescue, by Enrich, Seidel, Craig Jan 16, 2008, Section A1). Just like investors look to get a good deal by rescuing homeowners in distress through short sales and banks in distress through buying REO foreclosures, major players in global investment look to get a good deal by rescuing US banks and financial institutions. These investors are putting in billions to help cover loan losses and are essentially buying piecee of the US financial infrastructure for cheap. This is free market capitalism on a global scale.
So, even though there are more shoes to fall with companies announcing the effect on profits of more bad loans, the global financial system is under repair even as we wring our hands and try to place blame for loose lending practices of the past few years.
So, it seems to me to be a good time to figure out how to take advantage of good buys in the real estate market. Figure out how to hedge your bets that prices may drop some more. Lease options? Seller carryback seconds with negotiated debt retirement clauses? In many desirable locations prices have not gone down much at all compared to the ”Woe is us” newspaper headlines. Ask your realtor for stats of the areas that you wish to live in. And the most desirable areas will be the first to rebound big time. We all know that it is hard to precisely time any market peaks and valleys. So think strategically and look at buying real estate as a long term investment, not a way to flip short term bucks.
