What is Quantitative Easing, and why does it affect the housing recovery?

QE Quantitative Easing (QE) is the governmental practice of increasing the amount of money in circulation through the purchase of financial assets. In this case, the U.S. Federal Reserve bank (the Fed) has been buying $85 billion of bonds and mortgage-backed securities every month since December 2012. With $85 billion added to the banking system every month, money is in greater supply so borrowing rates go down.

Companies can borrow more easily, and invest that money in building their business (or paying more dividends / buying back shares). This makes stocks more valuable. It also kept mortgage interest rates historically low.

The U.S. is currently in its third round of QE. The first round started in Q4 2008 as a way of addressing the 2008 financial crisis. By the end of Q1 2009, both the S&P 500 and the DJI had started a climb which peaked in mid May of 2013, with the assistance of two more QE rounds. Both indices roughly doubled in value over that time.

But nothing good lasts forever. The Fed cannot simply print money and shove it into the economy because the effect on inflation would be disastrous. That is why the word “tapering” is now being used.

The Fed recently announced that it wants to taper (or slow down) the amount spent on QE and is looking at recent economic data to signal that the U.S. economy no longer needs this level of support.
And so, when surprisingly strong performance was noticed in U.S. housing and consumer sectors in July 2013, both the DJI and the S&P 500 started to topple. Just the suspicion that the Fed would lower its QE spending – before any official announcement was made – caused many investors to start a selling spree. In just a matter of days mortgage rates jumped 1%.

While testifying before the Senate Banking Committee later in July, Federal Reserve chairman Ben Bernanke stated “Because the asset purchases depend on economic developments, not on a preset course, we will be responding to the data, if they are stronger than we expect we will move more quickly, if they are less strong or don’t meet the expectations we will delay or increase purchases as necessary. When the economy is growing on its own it won’t need the Feds help and support.”

It appears that communication is the key ingredient in dispelling the panic that threw everything in a tizzy. After Bernanke’s testimony the stock market and investors had a better understanding of the Fed’s intentions and how “tapering” would be implemented, The mood in the markets turned positive almost immediately and mortgage rates stopped the rapid rise and settled into a normal fluctuation based on the economic news of the day – job creation, unemployment, inflation and the other indicators of growth or decline of the economy.

How has this affected the housing market? The housing market remains strong according to Anand Nallathambi, president and CEO of CoreLogic.. Housing prices increased by what the Chief Economist for CoreLogic called “a remarkable 10 percent” in the first six months of 2013. The 10 percent year-to-date increase was the fastest pace for home price gains since 1977.

Perhaps some of the best news of all came with an announcement by TransUnion on August 6th that Mortgage delinquency data shows that mortgage delinquencies are plummeting nationally. The rate of borrowers 60 days or more past due on their mortgages fell to 4.09 percent in the second quarter of 2013 from 4.56 percent in the first, a decline of 10 percent. Delinquencies were down 26 percent from the second quarter of 2012. With the rise in home prices many homeowners who were having trouble making their payments are now able sell or refinance into a more affordable mortgage.

The other key to a recovering housing market is the Affordability Index. NAR reported in a press release August 8th that despite rising home prices and higher mortgage interest rates, most buyers remain well positioned to afford a home in their area.

The QE “tapering” plan Bernanke is initiating is a slow and steady approach to getting the Fed out of the business of printing money to bolster the US economy. The timeline is tied not to a date but economic data. Maintaining a balance between rising home prices, interest rates and affordability will keep the housing recovery on track. Things to watch – job creation, unemployment data and delinquency rates.