QE3 may nudge more home sales to investors

The latest stimulus from the Federal Reserve may spur more home sales, just not to the intended buyers.

By buying up $85 billion in Treasurys and agency mortgage-backed securities each month through the end of the year and $40 billion in MBS for each month after, the Fed may force some institutional investors to substitute these assets for others.

Investors would sell these bonds for riskier assets, and since the crisis struck in 2007, there’s plenty of risk in housing.

“To the extent that the so-called portfolio balance effect of quantitative easing causes investors to demand alternative assets – such as direct exposure to housing – home sales to institutional investors could increase,” said Paul Diggle, property economist with Capital Economics.

Much of even the fastest improving housing markets are dependent on cash buyers. More than 43% of Phoenix home sales in July were made with cash, up from 40% a year earlier, according to real estate analytics firm DataQuick.

Traditional investors in mortgage bonds were already looking to buy up properties. Two Harbors (TWO), a real estate investment trust focused on agency and private-label MBS, is launching another company to acquire homes and rent them out.

It’s Fed Chairman Ben Bernanke’s hope that the increase in activity from the investor side drives up prices for homeowners taking smaller returns on their savings. Instead, he said, the stimulus announced yesterday could return equity for the more than 10 million borrowers still underwater.

“My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small,” Bernanke said during a press conference Thursday.

Buy owner-occupant homebuyers remain the elusive last key for a housing market showing signs of a recovery. The stimulus announced this week may not make mortgages much cheaper. Any drop may be offset by an increase in guarantee fees Fannie Mae and Freddie Mac are set to charge in November. The lender passes those charges on to the homebuyer.

Diggle doesn’t expect the 30-year fixed-rate mortgage to go lower than 3.25% after holding tight last week at 3.55%.

Too many are still looking for work and would be able to afford a home until they find one. This is where a wrinkle in QE3 might actually affect housing. Bernanke said the bond buying program won’t stop until economic indicators – mainly unemployment – tell him to. Still, that might be a ways out.

“We believe MBS purchases could continue for at least six months, if not much longer,” said JPMorgan Chase (JPM) analysts said in a research note after the announcement.

The Fed has some room. As of June 30, it held roughly $840 billion in MBS. At one point after the crisis, it held as much as $1.2 trillion. At $40 billion a month, Chase analysts estimate the Fed won’t reach the high for another 10 months.

“The bottom line is that the housing market will benefit from QE3. Just don’t expect it to mark a step change in the housing recovery,” Diggle said.

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