QE3 and Real Estate

While I believe that the main reason for QE3 is to bail out the major banks, one of the reasons that was given for QE3 is to stimulate the housing market.  So will QE3 help the real estate market?

The Fed is going to buy mortgage debt for this round of quantitative easing (money creation), instead of its typical method of buying regular government debt in the form or treasuries or bonds.  This is supposed to lower mortgage rates and help stimulate housing demand.

QE3 may or may not lower mortgage rates significantly.  Rates are already at or near all-time lows.  If you have good credit and a good down payment, you can get a 30-year fixed-rate mortgage for as low as 3.5% in some places.  Anything under 4% is really incredible.  I suppose if rates somehow go below 3%, then this will help the housing market on the margin.  However, I would think that most people who could buy a house and wanted to buy a house would have already done so.  So again, I think lower rates would help on the margin, but not very much.

There is a bigger issue that seems to be missing in many commentaries regarding real estate and QE3.  QE3 is inflation.  It is the creation of new money out of thin air.  If the demand for money doesn't change (or goes down), then the increased money supply will eventually lead to higher prices.

In an inflationary environment, people go into hard assets.  This can be gold, silver, oil, stocks (yes, owning stocks are a claim on the assets of a business), paintings, diamonds, baseball cards, etc.  Of course, a house is also a hard asset.  Therefore, house prices will probably go up if we see significantly higher price inflation.

Housing prices may not go up in real terms.  In other words, if you adjust for price inflation, prices could still go down.  There is still a lot of inventory owned by banks and there are a lot of delinquent "home owners", who really aren't home owners at all.  The banks essentially own their homes, but they don't want to go through the expense of foreclosing.

Just for an example, maybe we will see price inflation hit 10% per year, while housing prices are going up 5% per year.  Prices would be going down in real terms, but up in nominal terms.  It is still a better investment than having your cash in the bank, at least right now.  Plus, if you have a mortgage, then you would be paying it off with depreciating money.  The payments, adjusted for inflation, would be getting cheaper and cheaper as time went on and inflation kept going.

Of course, it is possible that housing prices could go up faster than price inflation.  However, I would be surprised to see another housing bubble start right now because so many people were burnt by the last one.  I think a bubble in another hard asset, like gold, is far more likely at this point.

If you are in the right position, investment real estate could be the deal of a lifetime right now.  You can buy at depressed prices with super low mortgage rates.  If price inflation picks up substantially, you can pay down your mortgage with depreciating dollars.  Meanwhile, rents will probably go up.

In conclusion, my guess is that QE3 will help the real estate market, but the low mortgage rates will not account for most of it.  It is the simple fact that money creation leads to higher prices in hard assets.