Wondering What the QE2 Fuss is All About? Read Here, then Watch Today @2:15 et for Big News!

A big week for the economy is off to the races this morning and interestingly, the Mid-term Elections on Tuesday are NOT the biggest story. We’ll get to those stories in a moment, but first let’s take a look at today’s rates. We are still right at historic lows in residential mortgage rates. During the past week they stepped up a bit and then back down as you’ll see below. The commercial rates are enjoying very low rates as well with lenders approving loans and money flowing a bit better than 6 months ago.

Residential Rates: conventional, conforming with normal closing costs are at 4.000% (APR of 4.146%). The No-brainer, No-cost Signet Homesaver loan sits at 4.375% (APR 4.364%) for loan amounts near $400k. These are both up only an 1/8th off of all-time lows and are excellent opportunities. And remember, with a No-cost refinance, the rate does NOT have to be lower than your current by a point or even half of a point to save you tens and hundreds of thousands on your home. See Signet’s Mortgage myths: (click here for more.) Incidentally, if you have a fast pay-back goal, the 10-yr fixed is now at 3.250% (3.297%) with all but $900 closing costs paid. Super-low down payment, 30-year fixed, no-closing-cost FHA loans are at 4.250% (APR 4.235%).

Commercial Rates: very competitive programs are funding Owner-User properties at 4.750% and Investor Properties at 5.250% fixed for 5 years with NO balloon payment, full amortizing 25 year terms. Multi-family 10-yr fixed are at 4.480% for loans over $1m and closer to 5.190% for loans under $1m.

So what news could be bigger to real estate financing than the Tuesday elections? The highly anticipated announcement Wednesday at 11:15a pdt of the Fed’s Quantitative Easing (QE2). The quick and dirty explanation of QE is that the fed essentially prints money and buys assets, thereby injecting more cash into the system. In this case their likely target of their buys will be Treasury bonds. Their goal is to impact the 3-10 year interest rates and pull down the yield curve a bit. If they are successful, long term money, including mortgage rates could come down, at least temporarily. The trick is to do this in a measured fashion, avoiding kicking off uncontrolled inflation, the worst enemy of long-term interest rates. For a good read on what the Fed might do, see this Fortune mag article by clicking here.

This planned Quantitative Easing has had a huge impact on the markets since it’s suggestion in the Sept 21 FOMC meeting minutes. (See the big green up arrow in the middle of the Mortgage-Backed Securities chart below – remember up in bond PRICES means down in bond RATES.)


Since that time, buyers buoyed the bond markets with anticipation of something similar to QE1 – the $1.5 Trillion dollar buy of bonds (MBS) by the Fed from early 2009 into March of 2010. Then over the last week or so (see the 5 in a row recent red bars), the buyers became worried that QE2 would be a disappointment and went into a sell off. The fear? Worries are significant in two areas: First, the concern around QE is always that such “printing money” will cause inflation. Indeed, inflation is the goal of the Fed with this QE2 effort, pushing up closer to the 2% inflation target and away from the disinflation worries we have been hearing through this year (avoiding the “lost-decade-like-Japan” scenario.) So while long-term rates will temporarily drop with the easing, there is virtual certainty that they will ultimately rise with inflation.

The second recent burst of the anticipation bubble has been a view of a much smaller QE2 than the $1.5T QE1. The numbers now range from a few hundred billion (ha! when did that become a small number!!!) to about a trillion. Much smaller than last time and the fear is that it will not be enough positive before it eventually still triggers inflation. The word from Fed speeches over the past 2 weeks fueled this fear. Bernanke himself saying they will need to take it slow, like test driving a new putter, tapping around until you see how it works. The number 1 inflation hawk on the Fed, Hoenig said much more dramatic things, like any easing is “making a deal with the devil”.

In any event, Wednesday’s report will be more important than the election news which seems to already be baked in. The other news of the week will be this morning’s inflation and spending PCE numbers and Friday’s October jobs and unemployment reports. The expectation there is for unemployment to stay at 9.6% and non-farm employment to rise by 60,000 jobs. Remember that it takes 100,000 job additions per month just to keep up with the work force growth as people become old enough to work – and THAT level doesn’t reduce the millions currently without jobs. We’ll be watching and keep you posted.

These days, more than ever, experience counts. Signet continues to grow and we appreciate your support. Please let us call your friends and clients who could use expert advice. Make it a great week!