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What Does QE Mean for US Housing?

What Does QE Mean for US Housing?. María Pía Olivero , PhD Assistant Professor of Economics, LeBow College of Business, Drexel University. QE: What Is It All About?. Provision of short-term liquidity to sound financial institutions

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What Does QE Mean for US Housing?

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  1. What Does QE Mean for US Housing? MaríaPíaOlivero, PhD Assistant Professor of Economics, LeBow College of Business, Drexel University

  2. QE: What Is It All About? • Provision of short-term liquidity to sound financial institutions • Provision of liquidity directly to borrowers and investors in key credit markets • Purchases of longer-term securities for the Fed’s portfolio • Agency debt • Agency MBS • Long-term Treasuries QE1 timeline QE2 timeline

  3. How Does QE Work? • The interest rate channel: • The safety channel • The liquidity channel • The duration channel • Specific to mortgage rates Lower interest rates Stimulate economic activity

  4. How Does QE Work? • The expected inflation effect: It raises expected inflation which further lowers real interest rates.

  5. How Does QE Work? • The wealth effect: Rising asset prices boost aggregate spending.

  6. How Does QE Work? • The credit channel: Rising housing prices alleviate credit constraints and lower credit risk.

  7. How Does QE Work? • The exchange rate effect: QE weakens the dollar, encouraging exports and discouraging imports.

  8. How Does QE Work? • The fiscal channel: Monetary injections relieve the government’s budget constraint, allowing for tax reductions and/or government spending increases.

  9. Table 1. Changes in various yields on QE1 event dates (in basis points) Effects of QE on Interest Rates Source: Krishnamurthy and Vissing-Jorgensen (Nov, 2010).

  10. Table 2. Changes in various yields on QE2 event dates (in basis points) Effects of QE on Interest Rates Source: Krishnamurthy and Vissing-Jorgensen (Nov, 2010).

  11. QE1 Effects of QE on Interest Rates Note: Spread between the 30-year fixed mortgage rate and the 5-year nominalconstant maturity treasury rate. Source: Freddie Mac and Board of Governors.

  12. A First Look at Housing: Is QE Working?

  13. A Second Look at Housing: Is QE Working?

  14. A Third Look at Housing: Is QE Working?

  15. Why Isn’t It Working? 1. Is the Fed really buying the longest-term assets?

  16. Why Isn’t It Working? 2. The Treasury has been issuing more long-term debt faster than the Fed has been buying it.

  17. Why Isn’t It Working? • Actual rates not declining as fast as published rates • Many investors priced out of this market

  18. Why Isn’t It Working? • Tighter mortgage underwriting requirements: • Higher minimum credit scores • Lower maximum LTV ratios

  19. To Conclude… QE seems to be having the intended impact on mortgage rates. But… for several reasons, housing is still not responding.

  20. QE1 Timeline • November 25, 2008: The Fed announces QE1 program and that it would buy up to $500 billion in agency mortgage-backed securities (MBS) and up to $100 billion in agency debt beginning January 1, 2009. • December 16, 2008: The program was formally launched by the FOMC. • March 18, 2009: The FOMC announced that the program would be expanded by an additional $850 billion in purchases of agency MBS and agency debt and by an additional $300 billion in purchases of Treasury securities. • March 31, 2010: Fed mortgage bond buying program ends. • QE: What Is It All About?

  21. QE2 Timeline • August 27, 2010: Bernanke’s speech announces QE2. • November 3, 2010: The FOMC statement indicated that the Fed intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011 at a pace of about $75 billion per month (shift of focus from mortgages to securities). • March 15 and April 27, 2011: The FOMC confirmed its November 2010 commitment. • QE: What Is It All About?

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