Wednesday, November 28, 2007

Home Prices Dropped 4.5% In 3Q

According to the S&P/Case-Shiller index, housing prices dropped 4.5% year-over-year in 3Q, the sharpest drop since 1987 when S&P started tracking the data. The index also scored another record – the largest quarter-to-quarter decline, with a drop of 1.7% from Q2. Falling home prices will cause more borrowers to become “upside down” in their homes, meaning they owe more on their mortgages than their houses are worth. After tremendous writedowns on mortgage-backed securities, investors and financial institutions have lost their appetite for risky assets and, according to some publications, credit availability is so low that another crunch similar to the one observed back in August is possible. Opinions, however, vary, and some Fed members even believe a rate hike would be good for the economy, while Wall Street is almost certain that there will be a rate cut in December. I tend to believe that, in this chaotic situation, the Fed is very much likely to reluctantly cut rates another 0.25% to prevent further tightening of credit. They don’t like to be pressured but they will have to take expert opinions into consideration.

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