Clarifying today's housing terms...
Posted September 18, 2008 9:58 a.m. EDT
Updated September 18, 2008 10:05 a.m. EDT
Given the complex nature of housing today, I thought it would be helpful to bring to light a few definitions of terms used regularly not just in my blog, but in the local and national media alike…
Fed Funds rate – This is the rate of interest that banks use while lending money to other Financial Instiutions at the Federal Reserve (usually in an overnight capacity). This is the rate of interest that is at stake each time the Federal Reserve decides to either raise or lower “rates”. These are NOT mortgage rates. The Fed held steady on this rate Tuesday, which currently stands at 2%.
Prime Lending Rate – This is the rate of interest derived from the Fed Funds Rate (typically it’s 3% higher than the Fed Funds Rate) off of which banks lend to consumers for things such as car loans, credit card rates and home equity lines of credit. Prime currently stands at 5%.
Inflation - An economic term describing the rise in prices of goods and services over a period of time. Inflationary fears have been a concern for The Fed over the past few months (inflation generally puts pressure on the Fed to raise the Fed Funds Rate) –which seemingly had subsided recently – but with oil passing back over $100 today and with the weakening dollar today, it seems that inflationary fears haven’t completely left the building. The Federal Reserve Bank’s outlook on the future of inflation is highly uncertain at this point.
Recession - An economic term describing a general downturn in economic activity usually lasting for at least two calendar quarters or longer. Many economists believe that we are currently in the midst of a recession. Typically the Federal Reserve lowers the Fed Funds Rate during a recession to ease pressure on credit costs, thereby making it easier for consumers to return liquidity and spending to the marketplace.
Jeremy M. Salemson
Corporate Investors Mortgage Group, Inc.