The Federal Reserve Open Market Committee's decision on Tuesday afternoon to cut its two key interest rates--the Fed Funds Rate and the Discount Rate--by 50 basis points can only be viewed positively in the home building industry, but it may be a little early to break out the bulldozers and prepare for a return of the market.

"I don't think the Fed's move will bring back subprime or bring back Alt-A," said Robert Toll, CEO of Toll Brothers, during the Credit Suisse Home Builder Conference in New York Tuesday afternoon. "Maybe our boys righted the ship."

Toll said he remained concerned that the economy could be headed into recession, which would exacerbate the already deep housing downturn.

Likewise, Antonio Mon, CEO of TOUSA, said, "I don't see the rationale for the argument that a significant decrease will change the market."

Certainly, Wall Street considered the cuts good news for home builders as it sent their stocks soaring after the Fed announced its decision at 2:15 p.m. (Hovnanian, on the heels of its wildly successful national home sale over the weekend, led the group with a nearly 28.5% jump to $14.55 in after hours trading on heavy volume. Standard Pacific ended the day up 14.5% to $9.42 and Beazer was up 14.5% to $10.85. The rest of the group was up between 4% and 10%, with the S&P Home Building Index up nearly 5%.)

But there is likely more bad news to come in housing before the industry can leave this downturn behind.

"It's good news, but it is not going to make much of a difference to our forecast," said Patrick Newport, housing economist for Global Insight in Waltham, Mass. "We still think housing is going to fall further, and it is not going to turn around until the middle of next year. I'm expecting some really ugly housing numbers over the next two to three months. The worst numbers are still to come."

On a brighter note, Newport said, "It'll make some difference, in, for example, interest rates that are resetting. Some of these rates are closely linked to the Federal Funds Rate. But the problem with monetary policy is that it takes a while for the policy to have an effect, something like six-to-nine months.""

The Fed rate cuts won't directly affect fixed rate mortgages, because they are tied more to the 10-year bond rate, which is tied more to global economic conditions, Newport said.

Still, there is evidence that Fed rate cuts can act as a powerful stimulant to new-home sales. Pali Research, a New York analysis firm, put out a research note on Monday that detailed a strong relationship between Fed policy and the housing market. "The correlation between new-home sales and the effective Federal Funds Rate was strongly positive, much more so than we had expected--and with little lag in timing," the report stated. "Just as encouragingly, new-home inventories and month¹s supply had strong negative correlations with the effective Federal Funds Rate. In other words, when the Fed starts cutting, sales improve and inventory declines."

Pali found that new home sales increased after a peak in the Fed Funds Rate in all but two rate cycles from 1966 to 2000. On average, Pali calculated that new-home sales move up 8.8%, inventories down 5.1%, and month¹s supply down 12.1% 12 months after a peak in the Fed Funds Rate. Three months after the peak, sales were up 5% and inventories down almost 1%; after six months, sales were up 9.9% and inventories down 2.6% with average month's supply down 11.4%.

Pali did issue the caveat that the market had become so overheated before the downturn that it may not follow historical patterns this time around.

It remains to be seen how long the Fed will hold to a policy of easing rates. Given its stated concern with inflation, and recent predictions from former Fed Chairman Alan Greenspan that inflation is likely to continue to afflict the economy, the Fed's rate cut may prove a "one then done" strategy meant solely to keep the economy from plunging into recession.

Lending some weight to that view was Neal Soss, chief economist at Credit Suisse, who said during the conference, "Within a year to 18 months, the funds rate will be back to where it was."