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In yet another attempt at jump starting the economy, the Federal Reserve’s
latest major stimulus action, known as QE3, is likely to have less effect on
the housing market than Fed Chairman Ben Bernake would hope.
QE3, shorthand for the third “quantitative easing” effort undertaken by
the Fed since the onset of the Great Recession, essentially involves the Fed
buying up a great many bonds to increase the money supply and reduce
interest rates. With the first two attempts having dubious results –
depending on who you ask, they either slowed the economic decline without
reversing it or accomplished nothing except lining bankers’ pockets – the
third is likely to be even less effective, as issues other than interest
rates govern the current trends in the housing market.
The Fed is limited to working through banks and brokers to try and effect
economic change, and this time the banks are not quite as quick to play ball
. While QE3 will reduce the interest rate banks have to pay to make loans,
there has not yet been a corresponding decline in customer interest rates to
take out those loans and actually put them to use buying or building homes.
The banks claim this is because a reduction in rates would result in too
many customers overwhelming their fixed capacity to make loans. Critics
believe this hogwash, arguing that banks are simply taking advantage of the
lowered interest rates for themselves while widening their profit margins on
the extra-safe loans they are exclusively making right now. Either way, it
will be some time before rates start to fall for the everyman.
But interest rates and affordability of loans are not the only two issues
limiting the growth of the housing market. One major concern is that, with
mortgage interest rates already depressed from earlier economic efforts, the
pool of people willing or able to take out a loan has shrunk dramatically.
At the top you have those who were not hit especially hard by the recession:
four years later, most of them have already used the low interest rates and
their own favorable situation to make what purchases they were going to.
Below them are those with solid credit histories but a distressingly fallen
home value; many of these people have already refinanced when rates were
lowered years ago. At the bottom are those whose credit is insufficient to
qualify them for a new loan or refinancing – a group completely unaffected
by any attempt at making more money available.
Housing has historically been a major driver of economic recoveries, but
home purchases and refinancing have barely recovered despite all attempts to
the contrary. An overall economic resurrection will be difficult without a
corresponding increase in home values and consumer confidence. But with
interest rates already at their lowest point in a generation, and banks
either unable or unwilling to lower them further, the Fed is nearly out of
options.
Some analysts believe that over time, borrowers will again gain confidence
in the housing market and start to look for new homes to buy. But in some
markets, there might not be any homes to buy. In areas that otherwise
weathered the huge drop in home values that plagued most of the country,
there is a large lack of available, desirable housing for those who want to
move. While it has not been the focus of his speeches, some believe what
Bernanke really hopes with this most recent easing effort is an increase in
home building, giving builders and contractors the confidence to start
constructing new neighborhoods to house these alienated buyers without a
product to buy.
By Lily Spencer |
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