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How will the tapering of Quantitative Easing impact the mortgage and real estate markets?

 
Think Tank
Raphael Bostic,
 Ph.D.
Director of the Bedrosian Center on Governance at the University of Southern California
Previously Assistant Secretary for Policy Development and Research at the U.S. Department of Housing and Urban Development
Richard Green,
 Ph.D
Director of the Lusk Center of Real Estate at the University of Southern California
Previously Chair of Real Estate Finance at The George Washington University School of Business
Peter Muoio,
PhD, CFA
Managing Director at Auction.com
Senior Principal of Maximus Advisors with over 25 years of experience in real estate research

This is the first installment of HSH.com’s Think Tank series which features in-depth question and answers from the nation’s top real estate professors and professionals.

The Federal Reserve’s Quantitative Easing program has provided great benefit to American home buyers and homeowners alike by propelling long-term interest rates, including mortgage rates, down to record lows.

We asked Raphael Bostic, Ph.D., director of the Bedrosian Center on Governance at the University of Southern California, Richard Green, Ph.D., director of the Lusk Center of Real Estate at the University of Southern California, and Peter Muoio, Ph.D., Managing Director at Auction.com to offer their perspectives on how the tapering of QE will impact the mortgage and real estate markets.

Q: How will the tapering of Quantitative Easing impact the mortgage and real estate markets?
Raphael Bostic, Ph.D.
Director of the Bedrosian Center on Governance at the University of Southern California

A: In the short term, there will be some increase in mortgage rates, partially due to both the expectation that rates will rise and the psychological influence that the tapering has begun, but I’m not expecting a dramatic rise.

QE has been a smoothing tool for the economy. After the volatility that was caused in May when Fed Chairman Ben Bernanke first announced QE would begin to ease, the Fed is going to attempt to make as smooth a transition as possible. They don’t want to abandon it altogether, at least not at first.

Over the long term, the goal is to reduce the government’s footprint and have the private market regain its influence in determining the cost and availability of credit. However, given extensive government regulations in recent years as well as the influence of QE, it’s currently unclear how the private market will view real estate in the future. It could likely be more expensive to get a mortgage in the years ahead.

Richard Green, Ph.D.
Director of the Lusk Center of Real Estate at the University of Southern California

A: There will be a very small impact in the short term. Getting a mortgage has been less about mortgage rates and more about credit availability. Mortgage rates haven’t prevented homebuying—it’s access to credit that has prevented it. It’s more about the access to credit not the price of credit.

The Bernanke Fed has handled coming out of the housing crisis really well. Housing recovery would have taken a lot longer if not for QE. Housing is at a good place right now in terms of supply and demand. Over the long term, we won’t see any big increases in home prices; we’ll see a more normal housing market in the years to come. With rates rising as a result of QE’s tapering, mortgage lenders will again realize how profitable lending can be.

Peter Muoio, Ph.D.
Managing Director at Auction.com

A: There won’t be a lot of impact on the short term because even with the recent rise in rates housing is still very affordable. There are many other aspects of the housing market that are having an impact on demand and prices: growing consumer confidence, nationally increasing home prices that take away the fear of buying into a declining market, which are all positive for the housing market; and the recent slowdown in household formations, which is a negative, and to us, the bigger threat to short term home prices and sales than the rise in rate. Historically low interest rates have not only increased the interest in owning and refinancing a home, they’ve made it more affordable and as affordability remains so high, even after the recent increase in rates, I don’t see a lot of impact in the short term.

In the long run, rising mortgage rates will have a bigger impact. As rates increase further, they increase borrowing costs and will pressure monthly payments. This could put downward pressure on home prices and/or home sales could slow as a result.

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