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The Fulton Research Blog

QE2 is bad for housing in the long run

The Fed recently announced the second round of quantitative easing (QE2), with plan to purchase U.S. Treasuries to put downward pressure on interest rates. While likely unintended, the consequence of this action is that it will prolong the struggling housing market just when it should start to improve – when the job market recovers. At that point, the Fed will likely raise interest rates to counter inflationary pressures.

For short-term loans, like a car loan, the low rates are a fantastic incentive to purchase. However, with a 30-year mortgage, this stimulus measure will have a long-term negative impact on the housing industry. Why? Because home owners normally do not pay off their mortgage. The home owners who secure a sub-5% mortgage will be locked into their low-rate mortgage with little motivation to move and take on a higher mortgage rate.

The optional buyer will become largely an affluent consumer who can absorb a higher rate. The less affluent homeowners have to answer the question, “Can I afford to leave my low-rate mortgage?”

As rates rise, the need-based buyer will become the core home buying segment. What creates the need-based buyer? Marriages, divorces, new babies, relocations and aging come to mind. For those home builders planning your company’s five-year business plan, these are your core target markets.

As a consumer, enjoy today’s low rates, buy a car and take part in growing this economy. As a housing professional – now is the time to plan for the future.

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