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Author: Rhadamanthus Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 97  
Subject: Re: Poll: Housing Bill Date: 6/30/2008 2:30 PM
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The housing mess is NOT the FAULT of the Federal Reserve System for keeping rates low. Low rates are good for home buyers as well as home sellers

Lower rates do cause home prices to increase because most people do not purchase a house with cash, they purchase a mortgage (essentially = base price of house + interest payment). If everything is working properly they purchase a mortgage that they can repay and the lender requires a down payment and does not overextend credit.

If the rate is lower relatively more mortgage payment goes to the house (and helps to drive up housing prices); if the rate is higher more mortgage payment goes to the lender. Low rates are not as good for home buyers as many believe because the lower payment is eventually offset by increased base costs (however, low rates are unambiguously good for refinancing and sellers).

Surely the Fed knew that home prices were increase much faster than inflation for the first half of this decade? Probably the Fed had many good reasons to cut rates and keep them low and I am not interested in second-guessing their decisions, but I will not say that they are blameless for the housing situation.
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