6 Things to Know About the Fed Ending ‘Quantitative Easing’ and How it Pertains to Housing

by Peter Thomas Ricci

The Fed announced earlier today that it was ending its third round of Quantitative Easing, but what does it have to do with housing?

The Federal Reserve announced earlier today it is officially ending its third round of Quantitative Easing (also known as QE3), a decision that closes the book on the central bank’s longest-lasting response to the financial crisis of 2008.

Though the decision surprised nobody – the Fed had, after all, been indicating for some time that QE3’s days were numbered – debate has raged on both the nature of QE3 and what its long-term effects will be on the U.S. economy; so, with that economic malaise in mind, we have decided to isolate several of the most important details of QE3 and its implications for the housing market and greater economy.

1. QE was Massive – It’s difficult to overstate just how massive of a policy QE truly was. Taking part in three separate phases (more on that in a moment), QE involved the Fed directly infusing trillions of dollars into the American economy via bond purchasing programs; so in other words, the Fed purchased bonds from banks and other entities, thereby increasing the money supply and, it hoped, pumping more money into the economy and thereby stimulating economic activity. How many bonds did the Fed purchase? As this graph from The New York Times demonstrates, the Fed’s assets have more than doubled since 2009 to $4.48 trillion. So yes, lots of money went into quantitative easing!

2. QE was Resurrected Twice – As we previously stated, this was the third and final round for QE, and it’s been an eventful ride for the policy. Way back in 2009, when then-Fed Chairman Ben Bernanke announced QE, he stated that the policy would only end “when credit markets and the economy have begun to recover.” That recovery proved much more difficult to reach than the Fed anticipated, and as a result, it resurrected QE not once, but twice in an effort to push the economy over the hump and into stable ground. The Fed seems confident, though, that it will not have to resurrect QE a third time.

3. QE Worked Very Well for Some – Though unemployment has fallen since 2009, the clear winner in QE policy was the stock and bond market, both of which have thrived since 2009 and returned to pre-bust levels. Of course, the problem with such a dynamic is that stocks and bonds are predominantly owned by the affluent, and QE failed to impact the salaries and wages of more ordinary workers. Case in point – for the bottom 90 percent of the U.S. labor force, current earning are reminiscent of 1986.

4. QE is POLARIZING – It comes as no surprise, then, that there is hardly an economic consensus on whether QE was the proper recessionary policy for the Fed to pursue. In short, some economists are arguing that QE amounted to a temporary bandage over a permanent wound, and that it did little to address the systemic problems that plague the U.S. economy – and that, moreover, the economy of 2009 to 2014 became too dependent on the low rates and cash infusions of QE, all but setting up the economy for a step back when QE was inevitably shelved. As Worth Wray, a chief strategist at Mauldin Economics, put it to Equities, “Without another dose of stimulus, the US will likely slide into recession.”

5. What the Heck Does QE Have to Do with Housing? – We’ll address this question first from the most obvious position – QE3 was actually designed with the housing market in mind. Once QE3 took off in late 2012, the Fed focused its bond-buying sights on mortgage-backed securities, a policy that drove interest rates down to historic lows with the hope of stimulating consumer interest in housing. As we already mentioned, though, the low-rate policy created a market that was dependent on those low rates, and our recent article on pending home sales demonstrated how susceptible the market is to swings in interest rates.

Also, on a more macro level, housing remains dependent on two things – incomes and consumer perceptions of where the economy is heading – and considering that a shockingly low percentage of Americans can comfortably cover emergency expenses, and that a majority of Americans still think the economy is on the wrong track, we can safely say that QE has not addressed those fundamental issues (to say nothing of foreclosures and delinquencies, which housing continues to slowly work through).

6. Will Mortgage Rates Increase? – Of course, the big question on everyone’s mind is whether or not mortgage rates will increase; after all, all it took was the mere mention of ending QE from Bernanke for the markets to promptly freak out and send rates soaring to their highest level in years.

One this is certain – without the Fed’s trillions of dollars in support, mortgage rates will likely increase. What’s also certain, though, is that the Fed’s other interest-rate tools (namely its manipulation of the powerful Federal Funds Rate) will remain at historic lows for some time, so it’s unlikely that we’ll wake up tomorrow with rates at 10 percent.

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