QE2 and housing.

QE2 drops the dollar 2 ways.

1. It pushes down long term interest rates at least in theory. [however, if you check long term rates versus the most recent QE1, the correlation is not clear at all] Dollars are actually NOT traded world wide as cash so much, far more frequently, treasuries are bought and sold. So, obviously a perception that rates are going to be down, treasury prices change INSTANTLY to reflect this. I’ve seen some sources claim that the size and scope of QE2 should cause an instant 10 to 15% drop in the value of the dollar, and we may have seen this though much of it may have happened on the rumor before the process was actually announced or started.

2. Temporarily, acts like a creation of money. This leads to the ‘printing money’ theory of causing inflation, but this is not correct for several reasons discussed below.

3. What is the exit strategy? Unless the fed plans on a strategy of permanent purchases of US government long term debt, QE2, even as large as it is, ends at some point. At that point, one would expect both the dollar and long term rates to revert back to the pre-QE2 levels. In fact, one would expect this reversion quite some time BEFORE the end of QE2, as market participants begin anticipating the end.

4. At some point, the FED would be reasonably expected to unwind both QE1 and QE2. The hope would be, this happens at a time when the economy is growing stronger, and might be done more gradually, but notice that an unwinding will have EXACTLY THE OPPOSITE effects of raising interest rates, and strengthening the dollar, at a time when rates and the dollar would presumably both be higher and rising, thus amplifying both.

5. Much of the effect will likely be outside of the US. As commodity prices rise in dollar terms, it is very likely financial players take their eased interest rates out of the US and invest in Brazil, China, and India. The FED, very guilty for allowing and even encouraging several bubbles to build with epic poor results in the US, might very well be blowing bubbles in China, Brazil, Australia and Canada this time. This carry trade will unwind someday, and the crash may at least initially be almost all foreign.

6. The only inflation that will help housing prices is wage inflation. QE2 is very unlikely to lead to any wage inflation in the US, especially against a backdrop of extremely high un/underemployment. In fact, given government negative employment growth at the city/state/county levels, and the new republican power in congress likely stifling both bailout plans, and extensions to unemployment, we are likely to see very weak employment growth at best for the next 18 to 24 months. Basically, if we are lucky, the real economy will grow enough to offset the cutbacks in government funded employment, so we don’t slip back into job losses, but nowhere near enough to cause ANY wage inflation at all. Hopefully, by two years from now, the state/city/county budgets are in order, and then continued economic growth will actually lead to employment gains, as they won’t be merely replacing government employment losses, but even so, we are many many years away from enough job growth to see sustained wage growth, maybe 5 years at the very least, but possibly much longer as in  10 or more years. So NO, QE2 is unlikely to help housing prices in any serious manner.

So, NO QE2 isn’t going to help your home prices at all in all likelihood.


About robertoaribas

Math professor, Realtor. 12 years of buying, selling, investing and managing rental properties. rock-climbing and salsa dancing. robertoaribas@gmail.com
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One Response to QE2 and housing.

  1. mac says:

    Was reading your comments on zillow.com…. very interesting. I’m a Canadian thinking of making an eventual purchase of a condo in Scottsdale. But watching the real estate meltdown from afar is both tempting and terrifying. Your analysis is bang on and personally, I want to thank you for calling some of those idiotic buy-now-or-be-priced-out-of-lower-interest-rates-forever agents fools.

    Up here in Vancouver, BC, Canada the market is still inflating, can U believe it?! It’s not fun being the last market in the Western world to be in a potential bubble. I have come to the conclusion that our market will only burst when China bursts and, of course, no one has real, clear data on China outside The Party. That, and when the Canadian government stops following Bernake’s monetary policy, which is leading our market into the stratosphere with debt-addicted FTBs getting in way over their heads while rates hover near 1%. What fun.

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