Interest Rates, Stimulus Dollars and Real Estate Activity
Last week the Federal Open Market Committee (FOMC) held the most anticipated meeting of the year. Investors and economists had high expectations for Bernanke & Co. to launch a new round of quantitative easing.
Under this type of program, the Fed injects more cash into the economy by purchasing bonds in the open market. This in turn pushes interest rates lower and helps to stimulate economic activity.
Thursday, the Fed announced that they would initiate a new program under which they are committed to buy $40 billion worth of mortgage-backed securities (MBS) each month for the foreseeable future. This is in addition to the current program in which the Fed is buying $40 billion worth of Treasury bonds per month.
The Fed also reaffirmed their commitment to keep interest rates essentially at zero – and they are extending the time period for these rates through mid 2015.
Even though traders and economists had positive expectations heading into the meeting, the magnitude of the additional stimulus caught investors by surprise. Stocks rallied sharply after the announcement – reflecting expectations that the broad economy should respond positively to the additional liquidity and low interest rates.
How Does the Fed’s Plan Affect Real Estate?
There are two key ways that the Fed’s new round of quantitative easing will affect the real estate market.
First, the commitment to keep interest rates at historical lows through 2015 dramatically increases the risk of inflation. We have already seen the US dollar trade lower (leading up to the Fed’s announcement, and falling even more after the news release).
As the value of the US dollar declines, the purchasing power of dollar-denominated savings and investments will drop. Many economists refer to this as a “hidden tax” on savers because a fixed amount of dollars can no longer purchase the same amount of goods & services.
The way to guard against this erosion of value is to invest in non-dollar denominated assets – typically tangible assets such as precious metals or real estate. The great thing about an investment in real estate is that you can actually enjoy your investment while it appreciates in value.
If you would like to know more about opportunities to protect the purchasing power of your savings by investing in real estate, we should definitely have a conversation. There are a number of different options including purchasing vacation property, rental property, or investing in one of Ashford Capital’s residential development projects.
This is a great time to be protecting your hard-earned dollars and I would be happy to help you evaluate which options work best for your particular situation.
The second result of the Fed’s recent decision will be an increase in real estate activity. You see, with the Fed buying mortgage-backed securities, rates will continue to be very low – making it easier for individuals to purchase new or existing homes.
A couple of weeks ago, we talked about “residential mobility,” or the ability for homeowners to now sell their homes in order to upgrade to a new home or pursue new job opportunities.
As real estate transactions continue to increase, that mobility will become even better and there is simply no reason a current homeowner should be stuck in a home that he or she doesn’t want to be in.
Whether your home value is above or below your current mortgage balance, my team can help you explore options for selling or leasing your current residence, and we can also help you locate and purchase a new home that better meets your needs.
Let’s set up a time to get together and discuss how your real estate decisions can position you to take advantage of today’s economic environment. Don’t let inflation or a bearish perception of the housing market hold you back from capitalizing on today’s opportunities!
Wishing you every success,
Matt
Matthew J. Riedemann
Founder, President, & Managing Director
Ashford Capital Partners, Ashford Advisors
678-231-4579
[email protected]