Federal Reserve Intervention Should Aid Real Estate Investors

The Federal Reserve’s latest quantitative-easing move announced on Thursday should help prospective real estate investors who are seeking the lowest possible interest rates in buying property.

Real estate has been one of the primary causes of the continuing slow growth of the U.S. economy, so the Fed’s intervention should help make both residential and commercial real estate more affordable for investors looking to buy something tangible. Many observers think that a revived housing market, for example, would help to lift the United States out of its economic hole.

Well, the timing now may be good for those thinking about taking on a mortgage, or investing in real estate investment trusts (REIT). The Fed’s action to keep interest low for an extended period should support the real estate market, which has yet to recover from the full effects of a bubble several years ago.

The Federal Reserve specifically will purchase more mortgage backed securities (MBS) in its latest quantitative-easing move (QE3). The U.S. central bank announced Thursday that it planned to purchase a total of $65-70 billion MBS per month, upping its bet by $40 billion, from quasi-government agencies such as Fannie Mae, Freddy Mac and Ginnie Mae.

QE3 is the Fed’s latest attempt to push investors away from the MBS and Treasury markets, and into riskier asset classes. Previous debt purchases by the Fed undertaken through to previous rounds of quantitative easing helped to drive down the yields that many investors rely on for consistent dividends.

For Fannie Mae, Freddy Mac and Ginnie Mae to offer mortgages to prospective home buyers, they need to sell debt to provide the loans. It is in this market that the Fed will be buying the debt sold by these entities. In August, the MBS market issuance totaled $122 billion, so the Fed will be the purchaser of nearly half of the market going forward each month. This intervention shows unprecedented support for the mortgage market and the news alone has brought spreads on MBSs to record lows.

The Fed’s new, open-ended quantitative easing (QE) program also will mean a prolonged favorable environment for those who thrive on low interest rates, including home buyers and real estate investors.

However, certain analysts are skeptical that these low interest rates will equate to a more robust housing market. Interest rates have been low for some time now, and these rates have yet to help the real estate market return to its previous heights.

Certain buyers who want to take advantage of low rates have been kept away by higher credit requirements and larger down payments to qualify for a loan. Unfortunately, the newest QE program will not change those realities.

However, the QE program could be a great opportunity for current homeowners who are looking to refinance. For that reason, expect to see refinancing increase in the coming months, especially for those now paying interest rates of 4-5% or higher.

REITs, on the other hand, have cash available and should continue to benefit from ultra-low borrowing costs, as well as low capitalization rates. So far this year REITs have outperformed the market — even if stocks in general have reached highs not seen since 2007. Exchange traded funds that track REIT indices typically are up between 15 to 20% so far this year.

Each prior QE program has impacted the global economic system and affected certain markets, such as real estate. Watch for research reports in the weeks and months ahead from a variety of sources about the best places to invest to profit from the latest move by the Fed.