What Effect Will the End of QE2 Have on the Massachusetts Housing Market

A huge question is looming out there in the markets.  Let's take a look at where things stand.

 

What is QE2?

QE2 is short hand for the Quantitative Easing that the Fed is doing.  I won't bore you with how it actually works, but suffice to say the Federal Government is keeping rates low by ARTIFICIALLY keeping demand for US treasuries very high.  And, it's working.  The Fed decided on this course of action for several reasons, but the number one reason was that they were unable to lower rates any lower than they already are, and they needed another way to keep rates low.  The solution was to buy massive amounts of Treasuries.

 

What Happens When QE2 Ends?

Well, the thing that will happen for sure is that there will be fewer buyers of US Treasuries.  Less demand should make rates go up.  And if rates go up, than mortgages, credit card rates, and interest rates will probably all go up as well.

 

How Much Will Rates Go Up When QE2 Ends?

It's Clear To Me That the Fed Has Made Housing a Priority

The answer to that question is the big enchilada.  Wouldn't we all like to know?  What we do know is that it will depend on various factors:  How ugly the European credit crisis gets is probably number one on that list, because if people aren't buying European bonds, they'll be buying Treasuries.  If the stock market continues to climb as employment continues to fall, that will put pressure on rates to go up as well.

 

How Will Housing be Impacted When QE2 Ends?

Any increase in rates is going to have some negative impact on housing prices and demand for housing.  That's just how it works.  However, in Massachusetts, we have (generally) low inventory levels, limited amounts of distressed housing, better than the National Average Unemployment, and Higher than the National Average Incomes.  Basically, if jobs improve faster than rates go up, the market may stay flat or even improve.  But we won't really know until we see how much rates move when the Easing Ends.

 

Other Factors that May Help Housing When QE2 Ends

One of the decisions that the Fed is looking at is the strength of the private markets to finance housing.  And, it's pretty clear to me, that are lot of banks in this area are feeling better about housing than they have in a long time.  They are coming up with innovative programs and holding on to loans (also known as portfolio loans) more than I've seen them do in 5 years or more - since the bust, basically.  These will get more buyers in the market.  It also doesn't hurt that rents are way up over last year - maybe 10% - and even then, availability is scare.  Renting, always expensive in Massachusetts, has gotten even more so.  And I won't be surprised if a number of folks get tired of writing checks to a landlord for a home they don't own.

 

Bottom Line Prediction

I'm a little nervous about the end of QE2.  However, I think the availability of credit and the better than average job picture is enough momentum to see us through that.  I think other parts of the country may fare less well, but I think it'll be steady as she goes in Massachusetts.  Maybe a hiccup or two, but we're used to that at this point.

 

Do Good Things Today!

 

 Matt Heisler