EASE ON DOWN THE ROAD: WHAT QE3 MEANS FOR HOME LOAN RATES

In September’s issue of YOU Magazine, we discussed the possibility that the Federal Reserve would announce further purchases of Mortgage Bonds to keep home loan rates low and help the economy continue to grow. On September 13th, the Federal Reserve announced that it would indeed begin another round of Bond Buying (known as Quantitative Easing or QE3). If you’re in the market to purchase or refinance a home, you won’t want to miss the latest on this story.

Review: What Is Quantitative Easing? Quantitative Easing is when the Fed buys Treasuries and Bonds in the hope of achieving:

  • Inflation. To cause a general increase in prices and avoid a deflationary economy.
  • Employment. To encourage business expansion and keep the unemployment rate from getting worse.
  • Higher Stock Prices. Easing makes stock purchases attractive, causing higher demand and a buoyant stock market.

Remember, one of the consequences of Quantitative Easing is that the U.S. Dollar weakens, making U.S. exports more affordable abroad, as well as causing imports to appear relatively more expensive.

This is expected to help large multi-national companies expand and hire–since they presumably have a much larger direct influence on the economy than small businesses–thus stimulating our economy and, hopefully, creating more jobs in the process.

QE3: What Happens Next? With our economy still struggling (especially our housing and labor markets) and inflation appearing tame, QE3 was widely expected. The surprise was how aggressive it will be.

The Fed announced that over the next several months they will buy an additional $40 Billion of Mortgage Bonds per month, added to the $25 Billion or so they are already purchasing. That’s $780 Billion annually. 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.

The announcement also stated the Fed “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Meaning QE3 is “open-ended” and the $40 Billion per month will continue until there is a sustainable recovery–as long as inflation doesn’t rise too high or quickly. This is an important factor because inflation is the arch enemy of Bonds, as it reduces the value of fixed investments like Bonds. And since home loan rates are tied to Mortgage Bonds, home loan rates worsen when Bonds decrease in value.

If QE3 does lead to inflation, Bonds and home loan rates could suffer as a result. This is one factor in particular to watch closely in the weeks and months ahead. And time will tell if QE3 and this money injection into the economy will spark economic growth and lower unemployment…or if it will devalue the U.S. Dollar, raise commodity and asset prices like Stocks, and heighten inflation fears.

The Bottom Line 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 want to see if you can take advantage of today’s low rates, contact the professional who supplied you with this month’s issue of YOU Magazine.

This article was taken from my October 2012 issue of YOU Magazine. Click here to view the full newsletter.

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