John Caulfield contributed to this report.
Acknowledging "moderate" economic growth during the first half of 2007 and tightening credit conditions that could further intensify the ongoing housing correction, the Federal Open Market Committee Tuesday slashed the federal funds target rate to 4.75 percent.
Home builder stocks jumped on the news of the rate cut, with D.R. Horton, Lennar Corp., Centex Corp., Pulte Homes, and Toll Brothers all posting gains Tuesday afternoon. The biggest gainer on Tuesday was Hovnanian Enterprises, which saw gains of 15 percent.
But that may just be a temporary reaction, says Christian Weller, senior fellow at the Center for American Progress and professor at the University of Massachusetts Boston.
"Once the markets digest the news, they will settle down or even decline because it may be seen as a sign that the Fed knows something about the state of institutions and the mortgage market that the rest of the world does not know, i.e., people may assume that things are worse than they seem," Weller says.
At the Credit Suisse Homebuilders Conference in New York today, investment gurus, private equity leaders, and home builders were given a 15-minute break to watch the Fed's announcement on a live news feed. While a rate cut was widely expected, experts were unsure whether the Fed would cut its target rate by 25- or 50-basis-points. Reaction to the news of a 50-basis-point rate cut was mostly positive.
Ian McCarthy, CEO of Atlanta-based Beazer Homes USA, says that Tuesday's action by the Fed is more likely part of a multiple-step approach to prop up the economy.
"I expect that there will be subsequent cuts down the road," McCarthy says. "The message the Fed is conveying [to consumers] is that it's a good time to buy."
Hovnanian CFO Larry Sorsby feels the Fed's move could get consumers back in a home buying mood, noting that the cut will have "a significant effect on the psychology of the buyer."
At the end of his presentation Tuesday at the conference in New York, Moody's Economy.com chief economist Mark Zandi said the rate cut could do wonders for confidence, which has been flagging.
"The key link between monetary policy and the economy is confidence: investor confidence, consumer confidence, and business confidence," Zandi says.
But not all builders agreed that the rate cut would significantly alter the home selling and home buying market, where a massive oversupply of homes has flooded the market, driven down home prices, and caused potential home buyers to sit and wait for further price reductions. Lack of available credit to certain segments of the population--those without good credit scores and plenty of money in the bank--also has been cited as a reason home buying activity is off.
"It's not going to change mortgage rates, and it's not going to have an immediate impact on who comes into our sales offices," says Gordon Milne, CFO of Ryland Homes, based in Calabasas, Calif. "But it should give more people confidence about the economy, and their jobs."
Antonio Mon, CEO of Technical Olympic USA, based in Hollywood, Fla., expects more rate cuts, noting the Fed has a responsibility to quiet the current economic tumult. "They can't let this go on for much longer," he says.
"It will spur demand, but I don't see the argument that a reduction in rates will have a significant impact on sales," Mon says. "The inventory overhang is so massive that it is going to take several quarters for this to sort out."
Earlier this month the chief executives of America's largest builders met with Federal Reserve Chairman Ben Bernanke. Though the building CEOs have been mostly mum on what transpired in that meeting, National Association of Home Builders chief economist Dave Seiders also sat in on the meeting and says the home builders were effective in voicing "some pretty sobering messages about what's happening in the markets."
Seiders and the NAHB also supplied the Fed with results from a number of surveys the builders' group had undertaken, showing sales down and cancellations increasing in August, Seiders says.
John Burns, president of John Burns Real Estate Consulting, in Irvine, Calif., says he is proud of the CEOs for meeting with the Fed and "encouraging this reaction."
Still, Burns is skeptical about how much impact the Fed's move will have.
"Unfortunately, this reduction is too little and too late because it usually takes six months for a Fed cut to work its way through the economy, although its impact on mortgage rates is immediate," Burns says.
Weller agrees that the rate cut may not be a cure-all that some seem to hope it is.
"The current mortgage and housing market troubles were several years in the making, and it could take several years for the oversupply and the bad loans to decrease to a level where mortgage lending activity will increase again," Weller says.
In announcing its first change to the federal funds target rate since June 29, 2006 (when the Fed increased the rate from 5.0 to 5.25 percent), the Federal Reserve cited risks of further tightening credit conditions intensifying the housing correction, leading to restraints on economic growth.
"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed said in a statement announcing the rate cut.
In addition to cutting the Fed Funds rate, the Fed also announced a 50-basis-point decrease to 5.25 percent in the discount rate, the overnight rate it charges banks to borrow directly from the Fed. On Aug. 17, the Fed announced it was decreasing the discount rate from 6.25 percent to 5.75 percent to allow banks easier access to cash.
While the Fed did not promise any future cuts to the Fed Funds rate Tuesday, as some had hoped, it did leave the door open for just such a move.
"The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," it said in the statement.
Learn more about markets featured in this article: Atlanta, GA.