What's Quantitative Easing?

In the statement released after its November meeting, the Federal Reserve announced that it will purchase a further $600 Billion of longer-term Treasury securities by the end of the second quarter of 2011, in what is known as another round of Quantitative Easing (or QE2).

What is Quantitative Easing?

Quantitative Easing is the concept of the Fed becoming a heavy buyer of Treasuries and Bonds. This is done to artificially cause those security prices to move higher under the increased demand. That demand should, in turn, cause interest rates to move lower with the hope of stimulating the economy.

What other impacts might it have?

QE2 will almost assuredly hurt the US Dollar, which helps make US exports more affordable abroad as well as make imports appear relatively more expensive. Such a shift helps large multi-national companies, which have a large influence on the economy and the major Stock market indices.

How can QE2 impact mortgage rates?

While Stocks should benefit from another round of Quantitative Easing, Bonds may have a different reaction. And that brings us to the heart of what you need to know: What does QE2 mean to Bonds and home loan rates?

With another round of Quantitative Easing, Bond prices should initially improve because QE2 includes large Bond purchases.

But...the key word is "initially." That's because, even if Bonds show signs of initially improving, the eventual softening of the Dollar, rising commodity prices, and rise in Stock prices could become a drag on Bonds, which would negatively impact home loan rates.

The bottom line is, QE2 and a weaker US Dollar may make our exports more attractive to foreign buyers, but it may ultimately drive rates higher. That's an important point to consider if you're thinking about refinancing or purchasing a new home. The reality is, home loan rates are still near historic lows, but won't be forever. If I were a betting man I would say that we have about 18 months before rates start rising dramatically as these types of strategies to get the economy in gear take time to work through the system.

CMHC Fall 2010 Housing Outlook

CMHC just put out its Outlook for 2011, stating that we will likely experience a stable market. Below are the main points I have picked out:

• Mortgage rates will be flat in 2011, meaning they won’t rise much;
• Home prices will flatten, meaning we likely won’t see a 4-7% increase in prices next year;
• Employment will be up slightly in 2011 in the KW and Guelph CMAs;
• Immigration will fuel population growth in the area;
• Prices in Guelph and KW are attractive for people from the GTA, and will fuel more housing starts to keep up with demand in housing close to the 401.

All these points lead to strength in the housing market in 2011 and beyond. Don’t expect housing prices to drop 10% next year. KW and Guelph have already surpassed the number of total people employed pre-recession. The more people with jobs that there are, the more people there are looking to buy homes.

Warm regards,

Chris

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Christopher Bisson

The Mortgage Centre

866-838-4366 x1003

www.guelphmortgagecentre.com