QE Forever and the Real Estate Market

One of, if not the main reason why I am negative on real estate, is government intervention. It is unpredictable. The most recent fiasco is obviously “QE-Forever”. Specifically, I am referring to Bernanke's plan to buy $40 billion of MBS per month indefinitely.

There were only $97 billion of purchase loan originations and $275 billion of refinance loans during the 2nd Quarter this year.



Mortages, purchase originations, via ycharts.com – click for better resolution.



Mortage refinance originations, via ycharts.com    – click for better resolution.



If the purchase loan volume remains the same, Bernanke will be purchasing 100% of all originations and still have $23 billion per quarter left over. The actual excess funds will be even higher, because agency MBS are not 100% of all originations and Bernanke is only buying those.

As for refinances, these are "pre-pays" and the funds that are prepaid will be looking for a new home. Bernanke is in essence squeezing out $23 billion a quarter from the private sector and forcing these investors into other instruments. While there is seemingly a huge volume of refinances right now, the $275 billion can vanish completely if interest rates go up, or simply do not go down any further. Who is Bernanke going to buy the MBS from? If your answer is the agencies, you are probably correct. Freddie and Fannie were supposed to start reducing the size of their portfolios since they were placed under conservatorship four years ago. Bernanke's hidden agenda is to assist the Treasury in reducing the agencies' portfolio of MBS.

Will Bernanke be successful in driving down mortgage rates? I think the odds are slim. Rates are already far too low. One way of looking at mortgage rates may be:

10 yr treasury + hard cost of a mortgage + a reasonable spread = mortgage rate (hard cost is origination, insurance/reserve, servicing etc)

QE-Forever is trying to drive down the 10 year yield while reducing the spread to zero, which no private investor would likely want to match. If the spread is zero, why not just buy the treasury note? How far below the current 1.8% range can the 10 year note yield go? As a reminder, the QE's to date have driven mortgage rates from the 6% to the current sub 4% range with absolutely dismal results. Would an extra quarter percent really do anything for the market?



The 10 year treasury note yield via StockCharts – as an aside to Ramsey's remarks, we would note that whenever the Fed starts a 'QE' program, inflation expectations tend to rise, and treasury yields tend to rise with them. This time, inflation expectations were already at a fairly elevated level even before the Fed announced 'QE3'. Wither bond yields? PT – click for better resolution.


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One Response to “QE Forever and the Real Estate Market”

  • jimmyjames:

    QE-Forever is trying to drive down the 10 year yield while reducing the spread to zero

    I would add-according to Bernanke the end goal is to make you feel richer and buy a house-

    A Hail Mary pass at the end of the game in hopes that a bubble catches?

    His words-

    There are a number of different channels — mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more — more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.

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