By Peter Ricci
Late last week, the Federal Reserve responded to calls for action with another round of fiscal stimulus, by far its most ambitious yet. Operating under the sexy name of “quantitative easing” and involving the monthly purchase of $40 billion in mortgage-backed securities, the intention of the policy is to increase liquidity, keep interest rates low and spur economic activity; now that the dust has settled from the announcement, though, a valid question has arisen – what is the relationship between quantitative easing and housing? and is it a good one?
Quantitative Easing and Housing – Yay, or Nay?
The key factor in judging how quantitative easing and housing will coexist is interest rates, and how they can stimulate housing. Analysts have raised two interest trains of thought:
- A CNBC analysis found that if quantitative easing contributes to a 0.125 percent drop in interest rates (which was the impact of the Fed’s announcement on markets), consumers have 1.5 percent more purchasing power, which could boost sales, increase prices and drive more sellers into the market.
- The skeptical folks at The Wall Street Journal, though, also made a valid point: interest rates have been criminally low for quite some time, and though housing demand has improved in recent months, it has not been by exponential levels; so, what good will a few more basis percentage points do?
- Also, The Real Deal pointed out that with how many refinancings consumers have already filed (a process that has overburdened banks and, arguably, kept rates higher), it’s unlikely that new mortgage applications would rise by any significant amount.
It’s Home Financing, Stupid
Ultimately, many analysts, including NAR Chief Economist Lawrence Yun, are arguing that the one true remedy to housing’s ills is more lending by banks. According to Yun’s analysis, “sensible lending standards” would inspire 500,000 to 700,000 additional home sales in 2013 alone.
Yun concluded that all banks need to do is recognize that the housing market is improving, loosen their lending restrictions and free up the “large volumes of cash” that are currently sitting on their balance sheets and collecting dust.
So is that really all there is to it? No fancy relationships between quantitative easing and housing and other jargon? Simply more lending for more homeowners?