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On Reserve

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On Reserve

The Federal Reserve Board lowered interest rates this week by half a point and financial markets reacted enthusiastically.

By Paul Deffenbaugh September 30, 2007
This article first appeared in the PB October 2007 issue of Pro Builder.

The Federal Reserve Board lowered interest rates this week by half a point and financial markets reacted enthusiastically. I hope this will edge us closer to a complete reversal of fortune.

In a coincidence of timing, Alan Greenspan, retired chairman of the Fed, has been on the promotional tour for his new book. I'm sure there are people out there who are confused by these two coinciding events and must believe Greenspan is responsible for lowering the interest rates.

What is interesting is the message Greenspan is spreading. To paraphrase, he said that all of the economic modeling he has done over the decades has not increased or decreased his ability to predict economic movement. If he could model people's attitudes, he would much more easily be able to predict the economic climate.

In other words, "it's not the economy, stupid." It's the people. Take for example the reaction on Wall Street to the half-point drop. If the financial markets had been expecting a full-point drop, there would have been a nearly opposite reaction. But, because they were expecting less than a half, there was robust approval. In a computer-based model, that half-point reduction should have had the same effect whether it was anticipated or not.

What does all this mean for home builders? Peoples' attitudes toward purchasing a new home have less to do with interest rates or lowering prices than they do with how confident they feel about this purchase.

This is good and bad news. The bad news is, as individual business owners, we can't pull the levers that create large-scale shifts in economic policy. We can hope the Fed lowers interest rates, and we can lobby for credit relief, but we can't enact them. The good news is we can influence our prospects' attitude by sending the right message.

And what should that message be? I believe success breeds success. If people know you are selling homes, their confidence will increase. Your community needs to see and hear about the traffic you're getting. It is time for builders to create a new reality about home buying. And the new reality is based on the perception that this is a good time to buy, people have recognized it is a good time to buy, and — contrary to press depictions — people are buying homes.

630/288.8190, paul.deffenbaugh@reedbusiness.com

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