Last week, the Federal Reserve announced a new round of “quantitative easing,” or QE3, meaning the Federal Reserve will fire up the printing presses to buy $40 billion worth of mortgage-backed securities (MBS) every month on an open-ended basis in an effort to further drive down historically low interest rates.
Federal Reserve Chairman Ben Bernanke said QE3 should put downward pressure on mortgage rates, helping the housing market. By lowering borrowing costs and spurring banks to lend more, the Fed hopes to induce more spending and eventually set the stage for more hiring. The Fed tied its bond-purchase program explicitly to jobs, saying it will keep buying bonds until it sees a substantial improvement in the labor market.
Who benefits from QE3?
Home-buyers and Investors
If you’re a first time home-buyer or an investor looking for rental property for cash flow, QE3 is good news. Interest rates are bouncing around at about 3.6 percent on a 30-year fixed-rate loan, while 15-year fixed-rate mortgages average around 2.9 percent, according to Freddie Mac. With rates this low you can essentially get free money — like a 15-year mortgage that basically tracks the rate of inflation if you have good credit and make a big down payment. QE3 will take them lower or at the very least, maintain the current rates.
Meanwhile, QE3 may have a bigger impact on refinancing than on home sales because the mortgage rate hasn’t held home sales back, it was unemployment and underwater borrowers. With some 12 million borrowers underwater and on the verge of foreclosure, QE3 may provide an opportunity to refinance into a low fix-rate loan and avoid foreclosure or a short sale.
Bernanke said he is prepared to extend bond-buying well into next year. As of June 30, the Fed owned $870 billion in MBS.
Do you think QE3 will benefit the economy and boost the housing recovery? Or should the government just get out of the housing sector and let it mend on its own?