From a more general perspective, QE has been blamed for inflating the prices of almost every asset class on the planet, as demonstrated by the variety of “QE vs [Insert Asset Here]” articles in this collection.

In most cases, the only boost QE has given prices has been due to psychological effects; that is people bid up prices because they believe that QE prints money, which will inflate prices.

In reality, QE does not change anything, due to the fact that increasing bank reserves is not the same as printing money.

While this holds true for the housing market, in that there isn’t a wall of QE printed “money” gushing into it, QE has still altered market dynamics in a real and substantial way.

QE’s real effect on the housing market can be thought of as coming through two channels.

The first of which is the interest rate channel, where lower rates across the financial system have led to historically low mortgage rates for borrowers. This has allowed folks who are lucky enough to have access to bank lending to borrow at these low rates and purchase real estate, driving prices higher. 

The second channel is the Fed’s purchases of Agency Mortgage Backed Securities (MBS). As a lot of attention is focused on the Fed purchasing Treasuries during QE, it is easy to forget that the Fed is currently purchasing Agency MBS as well.

Agency MBS purchases have an indirect effect on the housing market, because of the involvement of housing related Federal Agencies, also known as Government Sponsored Enterprises (GSEs).

These Agencies purchase mortgages made by banks, then securitize them by pooling and packaging them into a form of financial security that is more investable than individual housing loans, known as MBS.

The Fed, in turn, serves as a guaranteed buyer of Agency MBS in the fixed income market.

This means that any holder of GSE packaged MBS, be they asset managers, the banks who made the loans in the first place, or the GSEs themselves, can sell their holdings to the Fed (through the primary dealers of course).

Consequently, mortgage lenders are incentivized to make as many mortgages as they possibly can – easy, low risk money courtesy of the Fed. 

To be continued…