QE2 is Not a Cruise Ship

By
Real Estate Agent with Baird&Warner Fox Valley

In the past few weeks I simply tried to nod intelligently when I heard "QE2". I tried to decipher the sound "keweeetoo" but didn't get anywhere. Then when I saw the acronym "QE2", I guessed that it had to with the idea of turning around a battleship because a cruise ship is as big as a battleship. What, if anything, does this have to do with the real estate market?

I read today on Bloomberg.com: "The worst financial crisis since the Great Depression has made sustained price declines, which makes consumers and businesses less willing to spend or invest, a bigger concern to the Fed than faster inflation. For policy makers, the way to spark inflation is to increase the supply of money in the economy by purchasing bonds."

Cruise ShipSo for my equally perplexed clients and friends, I am referring back to last week's blog post from Steve Harney and the KCM Crew. He and his company, Keeping Current Matters, do a great job explaining market trends and data to real estate agents, home buyer and sellers.

Read on if you'd like to stop fake nodding, too.

Quantative Easing and the Impact on Real Estate

by The KCM Crew on November 8, 2010 

The economy is still struggling. Employment numbers are not improving. The housing market is stagnant. The Federal Open Market Committee (FOMC) decided that a new form of stimulus was necessary to kick start the job market and the economy. They decided to ‘put more money’ into the market. The term for the new stimulus package is ‘quantitative easing’ (QE2).

We want to take a look at what happened, what it means to the economy and ultimately what impact it will have on the residential real estate market.

What Happened?

The Washington Post reported on the FOMC’s actions:

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

What Does This Mean for the Economy?

In the same article mentioned above, The Washington Post explained:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

The Impact on Real Estate

Patrick F. Stone is president and CEO of Williston Financial Group, in an Inman News article, explained:

We have seen meaningful increases in commodity prices and stock prices in anticipation of QE2. With the implementation of QE2, and the hoped-for inflation, house prices will stabilize and — depending on the degree of impact and length of impact — housing inflation is a logical byproduct. Any meaningful housing appreciation will have a tremendously positive impact on the economy.

The U.S. News and World Report on their Money Blog addressed the issue of what opportunities now exist because of the FOMC action.

Interest rates have never been lower. It seems that just about every week mortgage rates set a new low. And this week the Fed is expected to undertake a second round of quantitative easing, QE2 for short, by buying up more government debt. As a result, incredibly low interest rates may go even lower.

But low rates don’t do us any good if we fail to take advantage of them.

The report went on to give the five ways one could take advantage of lower rates. Number one? Buy a home:

The combination of low rates and falling real estate prices make for a perfect time to buy a home. Particularly for first time buyers, there may never be a better time to take the plunge into homeownership than over the next year. Some say home values may still fall over the next year, so knowing exactly when to buy can be a bit of gamble. But locking in incredibly low rates on a 30-year mortgage is a great way to reap the benefits of the current interest rate environment.

Bottom Line

Interest rates will remain low and inflation will increase slowly if the Fed’s actions work as hoped.  After that, home prices will appreciate and interest rates without government intervention will return to historic norms. If you are looking to purchase, now is the time. If you can wait 12-18 months to sell, perhaps it makes sense to wait.

If you are looking to sell in the next several months, we don’t believe the impact of the government actions will take place within that time frame. Discuss your options with your real estate professional.

 

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This post was written by Leslie Ebersole of Baird & Warner Real Estate.
Use or reproduction of the material published on this site is expressly prohibited
without the express written permission of the author.

 

FOX VALLEY LIVING

 

My Email leslie.ebersole@bairdwarner.com

My Mobile (630)945-7935

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  1. Maureen McCabe 11/19/2010 10:15 AM
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Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Larry: Let me stop by you because I have something to drop off....are you in town next week? I'll call to set a good time.

Russell: the jargon slows me down, too, so I end up going to a few analysts for good overviews. Thanks for reading, and more importantly, for commenting!

Liz and Bill: Like most Realtors, I am also baffled by the buyers lurking in the shadows. Unfortunately I think it's just like how I feel about parenting toddlers or teenagers...they just don't believe you until they experience consequences for themselves.

November 17, 2010 10:45 AM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Lenn: I had a long talk last night about this "disconnect" with a DC person. It seems that just being there narrows the focus to the centrality of the federal government. I think the "beltway" folks need to spend more time in other parts of the country. I offered to a host a few of his guys for a tour of the suburban Midwest, maybe spend some time at the local coffee shop, but I doubt I'll be taken up on it.

November 17, 2010 10:55 AM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

George: My first real political memories are from the early 1970s and the call to "whip inflation now", so to me inflation has a scary sound. I also remember the word "stagflation", another circumstance to worry about.

You have terrific material here for a post, please share with the community -- let me know if you do.

Ruthmarie: Hi, thanks for the compliment but it is undeserved. Monetary policy is definitely a weak link in my intellectual chain.

But yes, I really like Steve Harney. I also subscribe to the KCM for the monthly reports, but I think I prefer the daily blog posts because they are immediate. Wouldn't it be cool to work for him?

November 17, 2010 11:11 AM
Rainmaker
672,825
Gene Mundt
Mortgage Lender - Chicago/Chicagoland Mortgages
www.genemundt.com

Leslie:  Cute little handy names, aren't they? Everything has a quick and easy tag to it ... it's what we're all about these days.  Unfortunately, the ANSWERS to these problems aren't as quick to address and figure out as the naming of them are.  I'm coming to the conclusion that the big picture .. the long winded, long running, never ending talk and coverage of the financial problems in this country are in fact keeping us IN the problems themselves.  The question is asked above .. WHY those sitting on the fence are not jumping off with the rates so low and prices down on homes?  The American people are paralyzed ... shell-shocked ... by all the terrible, depressing, onslaught of reports and news they are receiving.  They're AFRAID to do anything, fearing it will be the wrong thing.  So they continue to sit on that fence ...

We need to get TV, media, analysts, reporters, etc. to calm down and shut up a little.  We Americans need to get back to living life ... on the smaller scale.  Just my opinion though ...

Great article, as usual Leslie!  Keep 'em coming ... please!

Gene  

November 17, 2010 02:34 PM
Rainmaker
1,248,816
Carla Muss-Jacobs, Principal Broker/Owner
Buyer Focused ~ Buyer Results
BuyersAgentPortland.com | (503) 810-7192 Portland Metro Exclusive Buyers Agent | 100% Buyer Representation ~ 100% of the Time

Great post, Leslie and thanks for putting this altogether.  Yes, the housing market is consumer driven.  Buyers are a little on edge, don't blame them.  QE2, at least the "original" is still afloat.  Hope QE2 II doesn't capsize.  #1 comment was interesting too.  "Unfortunately, other countries affect our stability."  And, unforunately, our stability affects other countries.

November 17, 2010 02:46 PM
Rainmaker
156,802
George Bennett
Inactive Principal Broker, GRI
Inactive

Hi Lesilie, thanks for the suggestion. I did write a blog on Deflation and the Fed's QE2. Just a few observations from someone who works on and around Main Street.

November 17, 2010 03:24 PM
Rainmaker
260,985
Christianne Gordon
REALTOR e-PRO CDPE, SFR Carson Valley Real Estate Specialist
Carson Valley Homes and Land - RE/MAX Realty Affiliates

Thanks for being so informative and putting this post together. I did not know what QE2 was and got an email today from REOPRO but hadn't read it yet. Basically, it does sound like a devaluing of our currency which is basically an inflation tactic, but who didn't see that coming with the amount of currency the Treasury has been printing in the basement and feeding the economy with?

November 17, 2010 06:27 PM
Ambassador
1,227,260
Erica Ramus
MRE, Schuylkill County PA Real Estate
Erica Ramus - Ramus Realty Group - Pottsville, PA

Too many shorthand things to remember. QE2 ... whatever. It just means INFLATION is coming!

November 17, 2010 07:42 PM
Rainmaker
506,195
Patricia Aulson
Realtor - Portsmouth NH Homes-Hampton NH Homes
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate

Thanks for the post and the suggestions today.  Interesting for sure.

Patricia/Seacoast aNH & ME

November 17, 2010 07:56 PM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Jeff Belonger is one of Active Rain's most interesting experts on all things to do with money. Please go take a look at his detailed and informative post on this subject.

Do You Know Where Your Money is Going? QE2 - Quantitative Easing

 

November 17, 2010 08:13 PM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Patricia: Yet another subject we all need to know a little bit about.

Erica: Yes, it seems that way...

Cristianne: Here in the Chicago area we have found that printing money in the basement is a time-honored tradition for solving financial difficulties.

Carla: we shouldn't forget that we are still fundamentally the richest country in the world, with an enviable standard of living and way of life.

Gene: the consumer economy has been driven by "things" made overseas that rapidly lose value. It looks like we have many years of belt tightening in front of us so that we don't turn over a bankrupt future to our children and grandchildren. Thanks for commenting.

 

 

 

November 17, 2010 08:26 PM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

George Bennett has written an outstanding post on this subject. As a former professor of Computer Science and Mathematics he explains the issues around inflation and deflation very clearly.

Please go see George's post, it's very well written and very interesting.

Deflation and QE2

 

November 17, 2010 08:35 PM
Rainmaker
672,825
Gene Mundt
Mortgage Lender - Chicago/Chicagoland Mortgages
www.genemundt.com

Leslie:  There are many things that "drive" the economy ... and your mention of overseas input is but one of them, as is my personal theory.  I greatly appreciate your mentioning the articles written by the two other AR rainmakers.  As this is a many-tiered problem, the insight provided by these gentlemen greatly helps to address and educate about all the many layers of issues involved.  My theory may seem fairly lightweight in comparison, but I do believe it contributes and exacerbates  other problems.

Gene

November 17, 2010 10:51 PM
Rainmaker
449,171
Tim Maitski
The Agent Who Uses "Watermelon Tough" Sign Posts
Atlanta Communities Real Estate Brokerage

Here's a little mind experiment.

I think it's pretty much accepted that Quantitative Easing is just another name for printing money.  They print more money for the government to spend it on stuff and that's supposed to spur the economy.

Let's make it simple.  What if the government printed enough extra money and gave everyone $100,000 cash and made them spend it immediately? That would be some stimulus. But would there all of a sudden be an extra $100,000 of goods and services available for everyone to purchase? No.  There would be the same amount of goods but more dollars chasing after them and thus prices would go up. Printing money doesn't create new goods.  You can't print and spend yourself into prosperity. 

Blowing up another asset bubble isn't going to create real wealth.  Real wealth is created by saving and then using those savings to become more productive in creating new products and services.  With rates so low and taxes so high, what's the incentive to save? 

November 17, 2010 10:58 PM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Tim: education is truly wasted on the young. I wish I had a year to go to classes and read and think. I like the way you call it "a fancy name for printing money". Thanks for giving your perspective here because it is so valuable.

Gene: I'm an advocate of "smaller scale" as you describe it. We all need less stuff and fewer distractions. But this somehow will compromise the economy because we all won't get new ipods every year? Confusing. Thanks for coming back and sharing.

November 18, 2010 12:10 AM
Rainmaker
248,067
Carla Freund
Your Raleigh - Cary Relocation Specialist
Keller Williams Preferred Realty

Thanks for simplifying and explaining.  Great post!  Have a wonderful weekend.

November 18, 2010 11:42 PM
Ambassador
1,257,575
Debe Maxwell
Charlotte Homes for Sale - Charlotte Neighborhoods
www.AtHomesCharlotte.com | Savvy + Company Real Estate

Leslie, you did a fantastic job pulling this altogether.  I'm afraid that the first one didn't work, nor will this one.  I read the article as well and think that it's already a few days 'outdated!'  Rates have already begun to rise and, of course, it's happening during the slowest time (historically) in real estate!  Wish they would have waited until the spring so that this could get those savvy buyers scrambling to buy before the rates go any higher.  I guess we missed that boat too!

We'll just keep plugging away and hope that one day, this will be a 'Depression-like' story that we tell our grandchildren!

November 19, 2010 12:47 AM
Rainmaker
261,395
Jack Mossman - The Nines Team in Lodi
The Nines Team in Lodi
The Nines Team at Keller Williams

Leslie ... Not only is this an outstanding post in its own right, the commentary make me pretty sure that ActiveRain could replace the whole Congress ... and we'd be doing a far better job.  In fact, if we all asked Washington to look at things on Main Street (thank you George Bennett) we'd all be better off ... and so will our great-grandchildren who will ultimately have to pay for all this!

November 19, 2010 03:42 PM
Rainmaker
420,591
Leslie Ebersole
REALTOR - Chicagonulls Western Suburbs
Baird&Warner Fox Valley

Jack: I can't imagine that a group of dedicated Realtors would be worse than the people we send to Congress! Thanks for commenting.

Debe: This is what happens when you start to write something, get the flu, and then finish four days later -- it's already dated. I liked the comments form some knowledgeable people -- as usual, I learn more than I can give.

Carla: Interesting subject, hard to follow....thanks for commenting

 

 

November 19, 2010 08:31 PM
Rainmaker
332,875
Judy Greenberg
Coldwell Banker - Buffalo Grove - Long Grove Homes
Coldwell Banker Buffalo Grove- 350 Half Day Road

Leslie, your posts are always so insightful and well thought out.  I really do learn so much from your knowledge on so many topics. 

November 20, 2010 09:23 PM
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Leslie Ebersole

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