Bond Buy-Up: Why Skeptics Are Wrong About The Fed


By Colin Ryan

Industry News

Bernanke’s Bond Buying Spree: Will It Work?

On Thursday, the Federal Reserve announced its intention to double down on the real estate market’s recovery, with plans to start buying $40 billion of mortgage-backed securities per month.

The idea, of course, is to create a ripple effect that encourages more risk, starting with banks. Buying tons of mortgage bonds drives up their prices, which earns money for banks. In turn, banks can risk more money on loans, for which more buyers will qualify. Finally, buyers will benefit from lower interest rates, enabling them to purchase more home for their dollar, which will then help boost the prices sellers can fetch.

Some experts say this new round of bond purchasing won’t affect homebuyers and sellers much. They argue that most of the people who would consider buying a home due to rock-bottom mortgage rates have already done so, while those who would consider selling still owe too much money to be in a position to do so.

They also argue that uncertainty over the presidential election will delay whatever modest recovery the Fed’s actions might spur.

Thinking Long Term

These are all valid points. But if we’ve learned anything from all the measures the Fed and the government have taken to mitigate this recession, it’s that recovery will come not immediately, but gradually. As far as that goes, the Fed’s plans come with promises to extend near-zero interest rates well into 2015 and continue buying bonds aggressively until recovery is “well established.”

These promises say two important things to consumers. First, the kinds of assets that caused the housing collapse in the first place, long labeled toxic, are safe again. Indeed, by buying mortgage-backed securities the Fed—an authority when it comes to risk—is suggesting that they’re not only safe, but valuable.

Second, by committing to the long haul, the Fed is providing a safety net that will encourage optimism, coaxing consumers out of hiding. “Go ahead,” the Fed is saying, “buy/sell/build that home. We’ll be here to support you.”

Watering, Not Planting

Finally, the Fed isn’t trying to create recovery out of thin air. Rather, it’s building on existing signs that the housing market is mending in the wallets and minds of real estate consumers and professionals alike. True, those signs may be somewhat weaker than we’d hope; but by acting boldly, the Fed is pledging to nurture the hopes of homebuyers, sellers, developers, and brokers, turning them into something more: transactions.

What do you think? Will the Fed’s latest move have any impact on the housing recovery? Give us your insight in the comments!

Related Articles

An important reference when considering color schemes for your website design 5 Things You Didn’t Know About Website Design: Colors
Get our Newsletter Follow Placester