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Will Fed move help LI housing?

Federal Reserve Board Chairman Ben Bernanke says the

Federal Reserve Board Chairman Ben Bernanke says the Fed is open to purchasing more Treasury bonds to lower long-term interest rates and boost growth if the economy worsens. (June 20, 2012) Credit: AP

The Federal Reserve's move Wednesday to keep long-term interest rates low is likely to support Long Island's struggling housing market but won't be the spark needed for a full recovery.

That was the consensus of local real estate experts in the wake of the Fed's announcement that it would extend "Operation Twist," a program that aims to encourage borrowing and spending, through the end of this year.

The Fed also reiterated that it would keep short-term rates at historic lows until at least late 2014.

The outlook for U.S. growth has worsened, according to the Fed. The central bank now thinks the economy will grow no more than 2.4 percent this year, down from its prediction in April that the economy could grow up to 2.9 percent. And it thinks the unemployment rate, now 8.2 percent, won't fall much further in 2012.

Through Operation Twist, the Fed has been selling $400 billion in short-term Treasurys since September and buying longer-term Treasurys. It said it will extend the program through December using $267 billion in securities.

But extending the program might not provide much benefit. Long-term U.S. rates have already hit record lows.

Operation Twist could decrease mortgage rates by 0.10 to 0.20 percentage points, predicted Irwin Kellner, chief economist with MarketWatch .com, a financial news website based in Port Washington.

"That should help the Long Island housing market, which is in the process now of bottoming out," Kellner said. "The issue before us is not whether rates are low enough but rather whether people have the confidence to borrow and whether banks are willing to lend money."

Increasing consolidation in the banking industry means a few powerful players can impose standards that may have become too strict, said Michael McHugh, owner of Continental Home Loans in Melville and president of the Empire State Mortgage Bankers Association.

"Maybe it's gone overboard, where good loans are not getting a fair shot of being done," he said.

As for mortgage rates, McHugh predicted they would remain unchanged.

Even if rates don't fall by much or at all, the extension of current low rates through 2014 will help the local housing market, since working through the Island's backlog of foreclosed homes is likely to take 18 months, said Richard Guardino Jr., executive dean of Hofstra University's real estate center.

"As we work off that inventory, the market will start to rise and people will still be able to get mortgages at exceptionally low rates," he said.

With The Associated Press

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