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August 06, 2002

An interest-rate cut by the Fed this year could further fan the already white-hot housing market while fueling speculation that a bubble is indeed in the making.

"There's cheap money," said M. Myers Mermel, CEO of TenantWise.com - a real estate specialist focused on the New York market. "People can borrow up to 80 to 90 percent of the value of their home."

"Given the overall economy, there will be a lot of keys returned to lenders," Mermel warned.

Lower rates have helped create a sellers' market for homes. In the New York area, the median sales price jumped a whopping 20.9 percent in the first quarter from last year - from $236.3 million to $285.6 million.

Nationwide, the change wasn't nearly as dramatic, rising just 8.1 percent.

The Fed is scheduled to vote on interest-rate policy next week, although few economists expect the rate cut to come that soon. But while financing rates for autos, mortgages and credit cards have fallen along with key rates, experts say not to expect a consumer windfall from the next rate cut.

"Rates tend to trend lower slowly while increases tend to come fast and furious," explained Marc Schwarber, executive vice president of MortgageIT.com.

Even the first rate cut of the year probably won't spur much change in rates to consumers.

"Banks are not just running out there to lower rates. Rates are so historically low that banks have more loans than they know what to do with," Schwarber said.

So far this year Greenspan has avoided tampering with his handiwork, letting the fed funds rate stand at 1.75 percent since December last year.

But the widely followed fed funds futures show investors are counting on a Fed rate cut of a quarter percentage point in November.

Should a rate cut be in the bag, home sales could keep climbing. "It will continue to fuel activity in the housing market," said Philip Orlando, chief investment officer of Value Line Asset Management.

Copyright 2002 NYP Holdings, Inc.

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