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