Why Fed Fund Rate Cut Could Be a Good Move

The surprise move by the Federal Reserve in cutting the benchmark Fed Funds rate by 50 basis points to 4.75% may turn out to be the best move. Given the concerns in the credit and housing markets, it is hoped the cut in rates could halt the decline in the housing market. The August housing market numbers reflected continued softness. And, if everything plays out, I expect to see more evidence of softness in housing starts and building permits going forward.

 The monthly housing starts have not been above two billion since February 2006. The picture for building permits looks even worse. On Thursday, the released August housing starts of 1.331 million were below the estimate of 1.35 million and down from the revised 1.367 million in July. The August reading was the lowest level in over 12 years. In addition, the August building permits of 1.307 million were below the estimate of 1.35 million and well down from a revised 1.389 million recorded in July. The August building permits reading was the lowest since June 1995.

 What makes me believe the downward trend could continue is the fragile state of the subprime market and increased credit concerns in the banking system. The key will be the impact of the Fed Funds cut and whether it will help support the housing market. The issue may be whether it is enough to save the housing market.

 My view continues to be somewhat negative towards the building sector and the August data help to support this. Even the home renovation market has been under pressure, as homeowners reduce renovation projects. The key players such as The Home Depot, Inc. (NYSE/HD) and Lowe’s Companies, Inc. (NYSE/LOW) are struggling. Lowe’s is on an expansion plan in Canada, where Home Depot is the market leader.

 My view is to stay on the sidelines and wait for solid evidence of a potential reversal before jumping in and accumulating home and renovation stocks.