In the past few weeks I simply tried to nod intelligently when I heard "QE2". I tried to decipher the sound "keweeetoo" but didn't get anywhere. Then when I saw the acronym "QE2", I guessed that it had to with the idea of turning around a battleship because a cruise ship is as big as a battleship. What, if anything, does this have to do with the real estate market?
I read today on Bloomberg.com: "The worst financial crisis since the Great Depression has made sustained price declines, which makes consumers and businesses less willing to spend or invest, a bigger concern to the Fed than faster inflation. For policy makers, the way to spark inflation is to increase the supply of money in the economy by purchasing bonds."
So for my equally perplexed clients and friends, I am referring back to last week's blog post from Steve Harney and the KCM Crew. He and his company, Keeping Current Matters, do a great job explaining market trends and data to real estate agents, home buyer and sellers.
Read on if you'd like to stop fake nodding, too.
The economy is still struggling. Employment numbers are not improving. The housing market is stagnant. The Federal Open Market Committee (FOMC) decided that a new form of stimulus was necessary to kick start the job market and the economy. They decided to ‘put more money’ into the market. The term for the new stimulus package is ‘quantitative easing’ (QE2).
We want to take a look at what happened, what it means to the economy and ultimately what impact it will have on the residential real estate market.
The Washington Post reported on the FOMC’s actions:
The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
What Does This Mean for the Economy?
In the same article mentioned above, The Washington Post explained:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
The Impact on Real Estate
Patrick F. Stone is president and CEO of Williston Financial Group, in an Inman News article, explained:
We have seen meaningful increases in commodity prices and stock prices in anticipation of QE2. With the implementation of QE2, and the hoped-for inflation, house prices will stabilize and — depending on the degree of impact and length of impact — housing inflation is a logical byproduct. Any meaningful housing appreciation will have a tremendously positive impact on the economy.
The U.S. News and World Report on their Money Blog addressed the issue of what opportunities now exist because of the FOMC action.
Interest rates have never been lower. It seems that just about every week mortgage rates set a new low. And this week the Fed is expected to undertake a second round of quantitative easing, QE2 for short, by buying up more government debt. As a result, incredibly low interest rates may go even lower.
But low rates don’t do us any good if we fail to take advantage of them.
The report went on to give the five ways one could take advantage of lower rates. Number one? Buy a home:
The combination of low rates and falling real estate prices make for a perfect time to buy a home. Particularly for first time buyers, there may never be a better time to take the plunge into homeownership than over the next year. Some say home values may still fall over the next year, so knowing exactly when to buy can be a bit of gamble. But locking in incredibly low rates on a 30-year mortgage is a great way to reap the benefits of the current interest rate environment.
Interest rates will remain low and inflation will increase slowly if the Fed’s actions work as hoped. After that, home prices will appreciate and interest rates without government intervention will return to historic norms. If you are looking to purchase, now is the time. If you can wait 12-18 months to sell, perhaps it makes sense to wait.
If you are looking to sell in the next several months, we don’t believe the impact of the government actions will take place within that time frame. Discuss your options with your real estate professional.