What Is Quantitative Easing?

Last week, the Fed announced another round of Quantitative Easing (QE3).

What is Quantitative Easing?

Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and Bonds to try and stimulate the economy.

The Fed does Quantitative Easing when they are hoping to (1) create inflation and avoid a deflationary economy, (2) lower the unemployment rate, and (3) boost Stock prices.

 Why did the Fed announce QE3?

With our economy still struggling (especially our housing and job markets), QE3 was inevitable. But what caught the markets by surprise was the aggressiveness of the Fed’s action. Over the next several months, at the very least the Fed will be buying Mortgage Bonds at an annual rate of nearly $800 Billion.

What does QE3 mean for home loan rates?

The Fed is buying such large amounts of Mortgage Bonds each month to keep home loan rates (which are tied to Mortgage Bonds) near record lows, which they hope will help strengthen our housing market and economy overall. However, as the economy starts to improve and if inflation heats up, Bonds could face some selling pressure…which could impact home loan rates negatively as a result.

What Impact Will It Have On Home Sales?

Keeping interest rates low will definitely help. However, we are not sure it will be a driving force in a housing recovery. Rates are already at historic lows and the challenge to many buyers is availability of mortgage money more than it is the cost of that money (rate).

HSH Associates, which reports on trends in the mortgage rate environment explains:

“Looking across the potential audiences who want to buy homes, can a claim be made that interest rates are an impediment? More likely, credit ruined in the downturn, a lack of income, unemployment or even asset strength are keeping people out of the market. In addition, there is arguably a cohort which cannot participate due to a foreclosure, short-sale or deed-in-lieu effected over the last few years, and there is likely still another group who will not buy a home at all, having watched family and friends suffer mightily with real estate issues and losses in the downturn. In this way, lower interest rates aren’t much of an inducement for a lot of folks, and except at the margins, the change merely enhances the opportunity for people already well-positioned and motivated to buy a home.”

 Richard Green, director of the University of Southern California Lusk Center for Real Estate, echoed this sentiment in a recent MarketWatch article:

“While QE3 certainly won’t hurt the housing market, its short-term effect will likely be limited. The constraint that is keeping people out of the housing market is absence of equity. The drop in house prices means that many borrowers are underwater on their houses, and high unemployment has prevented potential first-time buyers from accumulating down payments.”

 

Keeping rates low can’t hurt the market and perhaps it will encourage some move-up buyers to make the move now. But few believe it will spur a dramatic increase in home sales.

 

 

About The Author

Jolie Powell

Jolie Powell has been a distinguised leader in the Real Estate industry since 1987. Prior to entering the world of Real Estate, she worked as a TV producer for the Advertising Agency, Dancer Fitzgerald Sample in NYC. Jolie's expertise in counseling buyers and sellers brings people together from Long Island, and indeed, Globally! Having lived abroad and traveled extensively, Jolie has an excellent understanding of many cultures. As a Cuban-born American, she is fluent in Spanish and communicates well with international clients relocating to the North Shore of Long Island. Jolie is proud of the high level of trust she and her clients have established and looks forward to continue building exceptional client/broker relationships.

Comments

  1. Byron September 20th, 2012 at 11:10:17 pm

    Jolie,

    Great post on QE3. I am in the Houston real estate market and sales are decent. The QE3 will at least help until mid 2015 to boost sells. I am wondering what will happen after that. I guess we will all stay tuned in.

    Take care,

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