Fed cut seen slim help for housing

By Lynn Adler - Analysis

NEW YORK (Reuters) - A Federal Reserve interest rate cut this week won't be enough to save the reeling housing sector, overwhelmed by unsold homes.

The ability to access credit in a new age of tighter lending standards has eclipsed affordability worries.

A Fed easing "is a little bit like chicken soup: it's certainly not going to hurt," says Nicolas Retsinas, director of the joint center for housing studies at Harvard University in Cambridge, Massachusetts.

"But we think the more significant problem in the housing sector is the inventory. It's not just the affordability of the credit, it's even the access to the credit, which is a question today."

The Fed is expected to cut its federal funds rate by 1/4 point to 4-1/2 percent on Wednesday after a surprisingly large 1/2-point cut last month. The move is likely already priced into the debt markets, which are a peg for mortgage rates.

The Fed probably will repeat its September statement that tighter credit conditions could intensify the housing slide and restrain economic growth, Barclays Capital economists say.

A credit crisis spawned by mounting defaults and foreclosures caused lenders to rein in years of loose lending, choking off loan access for many potential home buyers. Sales of existing homes plunged in September to the lowest level on record dating to 1999.

Unsold inventory ballooned to record highs.

Order cancellations are escalating as lenders crack down after being burned by mounting defaults and foreclosures on mortgages made to borrowers who cannot afford payments on adjustable-rate mortgages that have reset much higher.

"If mortgage rates go down, they still have to make it through the hurdle of credit quality," said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta.

"Banks have been very scorched, very burned by the quality of, in particular, subprime ARMs," or adjustable-rate mortgages made to borrowers with weak credit histories. "You could end up at that market-clearing, inventory-reducing price, but not be able to get financing. This one's getting rough."

Builder sentiment is at record lows, with sales sinking despite months of price cuts and other incentives.

Prices of existing homes fell in August at the fastest pace since 1991 and showed little sign of reversing, based on the Standard & Poor's/Case Shiller home price index, released on Tuesday.

PAIN LINGERS

The housing market has to endure at the least six months and maybe two years of pain before it starts a slow mend, based on various economic forecasts.