Real Estate & Mortgage Insights

QE3 isn't a Guaranteed Cure for Housing Market

In an effort to bring more life back to the U.S. housing market, the Federal Reserve decided recently to initiate a new round of economic stimulus. The big question here though is will it actually help ramp up the housing recovery?

This fourth qualitative easing--or QE3 as it is called--will include the Fed purchasing $40 billion of mortgage-backed securities each month through the end of the year, with an open-ended timeline depending on need.

"These actions... should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Fed said in its statement.

There are two potential issues might prevent this plan from being effective. The first is whether or not mortgage interest rates will really fall much further and the second it whether the help will reach underwater homeowners, the segment that is most responsible for holding back the recovery.

Mortgage rates have already been at or near record lows for the entire year. While there is still some room to move downward, it seems banks may not yet be ready to pass on lower rates to their customers.

"Bank of America, Wells, Chase, whomever, have fixed capacity. You can't take in more loans than you can handle," said Matt Vernon, a senior mortgage executive at Bank of America in a Washington Post article, adding that banks are not prepared to receive the rush of applications that would come if they lowered rates further at this time.

Some critics worry that banks are just beefing up their profit margins as the Fed lowers its rate instead of passing the savings onto borrowers.

And even if rates do fall even lower, say into the 3 percent range, will enough homeowners be able to take advantage of them to see any boost in the housing market? It seems that all borrowers who can qualify for low rates have already done so. At the end of the second quarter, about 69 percent of homeowners still had rates above 5 percent and 33 percent had rates above 6 percent, according to mortgage data company CoreLogic, even though average rates on long-term mortgages have been under 4 percent all but one week of this year.

And the stats are more telling for underwater borrowers, or those who owe more than their homes are worth and are generally disqualified from refinancing. Of those homeowners, 84 percent had interest rates on their home loans above 5 percent and roughly had rates even above 6 percent.

Lower rates do little to cure the underwater problem. Currently about a quarter of all homeowners are underwater, leaving them unable to refinance and unable to sell. This is keeping a significant chunk of the housing market populace stuck in their homes.

And there is another segment of borrowers who may not be underwater on their mortgages, but their credit histories have taken a beating in recent years and they are also unable to qualify for lower rates, again limiting the effectiveness of the Fed's plan.

One way QE3 may help is by keeping competition and demand for housing up. Many neighborhoods have seen a sharp decrease in mid-range priced homes, which has created bidding wars. All that competition may lead to more home building.

"When Bernanke talked about giving a boost to the housing market, he was really talking about home building," said Wells Fargo senior economist Mark Vitner. "Inventories are so low today and sales are growing that I think these actions are really meant to improve buying."

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