You may have heard rumblings in the news lately about something called Quantitative Easing, or QE3 for short. If you’re in the market to buy or refinance a home, this is one story to follow.
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. Oftentimes, the Fed does Quantitative Easing when they are hoping to achieve the following things:
- To create inflation and avoid a deflationary economy
- To lower the unemployment rate
- To boost Stock prices
Keep in mind that one of the consequences of Quantitative Easing is that the US Dollar will weaken. This makes US exports more affordable abroad, as well as makes imports appear relatively more expensive. This will help large multi-national companies–which have a large influence on the economy and the major Stock market indices–thus stimulating our economy and hopefully our Labor Market, which continues to struggle.
What Happened During the Last Round of Quantitative Easing (QE2)?
It’s important to understand that home loan rates are tied to Mortgage Bonds, and when Bonds improve, home loan rates typically move lower. History has shown that Bonds and home loan rates typically improve in anticipation of Quantitative Easing, but then worsen once the official announcement is made. Think about the old investing adage: “Buy on the rumor, and sell on the news.”
In a speech delivered on August 27, 2010 in Jackson Hole, Wyoming, Fed Chairmen Ben Bernanke mentioned that QE2 may be coming, saying, “I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.” But the Fed didn’t take action and begin QE2 until November of that year. Bonds and home loan rates enjoyed a nice rally until the actual official announcement was made.
However, once QE2 officially began in November 2010, we saw a big move higher in Stocks. By the time QE2 concluded in June 2011, the S&P 500 had risen 19%. And when investors moved their money into Stocks during this time, Bonds and home loan rates suffered as a result.
The Bottom Line
On August 31st of this year, Bernanke was back in Jackson Hole, Wyoming delivering anotherspeech on Economic Outlook and Monetary Policy. While he did not commit to another round of Quantitative Easing or QE3, he hinted that one was possible.
If rumors of QE3 continue to swirl, we should continue to see great home loan rates leading up to any actual announcement.
But if the Fed decides to move forward with QE3 and Stocks rally like they did during QE2, the Stock rally could come at the expense of the Bond markets–which would in turn push home loan rates higher.
The great news is that home loan rates remain near historic lows, making now a great time to purchase or refinance a home. If you have any questions about your personal situation, or if you’re wondering how you can take advantage of today’s low rates, contact me at 856-401-9090 x103.