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QE2 - Quantitative easing and it's effect on housing.
invite response
2010 Nov 4, 4:50pm 3,538 views 15 comments
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The fed is definitely following a weak dollar policy. That's not the same as domestic inflation though. People tend to get confused about this.
Even if it does nothing else, lower interest rates today makes stocks more valuable today in the same way it makes bonds more valuable today: their dividend is more valuable. And of course it's great for companies that are highly leveraged like financials. But that's a pretty minor factor over the long haul for stocks, and swings the other way too.
There seems to be this meme going around that the fed is causing commodity prices to go up dramatically. It's nonsense.
Of course a weaker dollar means higher oil prices, but that's about it, and it's a minor factor when you look at the correlation of commodities prices and the dollar index. The commodities bull has been happening for 10 years, and was well underway long before most Americans had even heard the term "Quantitative Easing".
A loose monetary policy does not suspend the laws of supply and demand for commodities. Same supply. Same demand (out of people wages) = Same price. Speculators can artificially drive it up for a short while, but not for long because unlike other investment classes they have to sell their contracts or take delivery.
PeopleUnited
2010 Nov 4, 6:52pm
A loose monetary policy does not suspend the laws of supply and demand for commodities. Same supply. Same demand (out of people wages) = Same price. Speculators can artificially drive it up for a short while, but not for long because they have to sell their contracts or take delivery.
When the supply of money increases for pretty much any reason (such as in a credit bubble which blew a housing bubble or when the FED creates money to try to reinflate the credit bubble and backstop the losses of the bad loans which was inflationary to begin with) you will see commodities increase in nominal cost. However if you use precious metals as the yardstick rather than trying to use the dollar as the yardstick you will see that for thousands of years gold has been the standard. You can pretty much buy today with gold the same things you could buy with the same amount of gold a thousand years ago. An ounce of gold buys you a nice suit or a nice toga in Roman times. Any ways, the point is: paper money loses value. Gold, on the other hand holds it. You won't get rich holding gold, but you probably won't regret having some either.
Then again timing is everything. Wish I'd have bought Net Flix shares a few years ago. If you want to MAKE money you have to ride every bubble and know when to get off. Or better yet, become a landlord and make others work for you. This is the system the FED created, a world where hard work is rewarded with decreasing returns and landlords are rewarded with increasing returns. You know... the whole rich get richer scenario.
Â¥
2010 Nov 4, 7:23pm
There seems to be this meme going around that the fed is causing commodity prices to go up dramatically. It’s nonsense.
If the dollar gets weaker then our farmers will export more of our food stuff for the same amount of income, reducing domestic supply.
Since oil is sold in dollars a weaker dollar will improve Chindia's oil buying power too.
Chinese-made goods might also increase in price, from what I understand when the yen strengthened 50% in the late 70s Honda etc. passed on that price increase to US consumers, who had no where else to go to get the popular fuel-efficient imports.
tatupu70
2010 Nov 4, 9:22pm
An ounce of gold buys you a nice suit or a nice toga in Roman times.
You should have waited for the after Christmas Toga sale...
An ounce of gold buys you a nice suit or a nice toga in Roman times.
You should have waited for the after Christmas Toga sale…
I wanted to but they had not invented Christmas yet in 50 B.C. and I needed a toga quickly - I was scaring the horses.
bubblesitter
2010 Nov 5, 2:21am
Housing always goes up. Thanks for asking.
If housing is gonna go up like crazy than we'll have the third world country kind of life style, because people won't have much money left for everything else other than paying mortgage.
MarkInSF says
There seems to be this meme going around that the fed is causing commodity prices to go up dramatically. It’s nonsense.
If the dollar gets weaker then our farmers will export more of our food stuff for the same amount of income, reducing domestic supply.
Oh, no doubt commodity prices get higher if the dollar gets weaker against other currencies, but that is far from the biggest driver of commodity prices. Commodities are getting more expensive in EVERY CURRENCY.
I'm talking about articles like the original poster's, or this on patrick.net from page:
Intended or not, the Fed's destruction of the dollar's value has pushed prices of commodities that Americans need -- such as instance food, cotton and oil -- higher.
Whether the Fed's QE2 policy will actually spark renewed growth in the economy is not yet known, but what is known is that the producer costs for essential commodities such as grain and cotton are skyrocketing, and those increased costs will soon appear on store shelves.
The dollar simply has not gone down enough to explain the rise in commodity prices. It has far, far more to do with what is going on in China and the rest of the world as their economies boom, and they consume more commodities.
The dollar is about 5% weaker than it's 2 year average year average. Sorry, that does not cause the price of cotton to double in 2 years.
I'll say it again: The commodities boom, and the occasional bouts of hoarding (like what's going on with cotton now), has been happening for 10 years, long before the fed expanded it's balance sheet.
Rice hoarding and peak price? 2007. Before QE was even thought about.
Peak oil futures? early/mid 2008. Before QE was even thought about.
Copper, wheat, uranium? Go look at the 10 year charts.
The "blame the Fed" crowd, is mostly just interested in blaming the Fed. Not in facts.
Mark_LA
2010 Nov 5, 4:51am
Housing always goes up. Thanks for asking.
If housing is gonna go up like crazy than we’ll have the third world country kind of life style, because people won’t have much money left for everything else other than paying mortgage.
For the most part, people in third world countries don't use mortgages. They add-on to their house little by little with whatever cash they can save.
Most people in Mexico first lay down the foundation one year, then next year they'll build the living room/bedroom, then a couple of years later, they'll build a kitchen. All around the country you see half-built homes and even rooms with the concrete block walls made, but missing a roof since they're still saving for that part a couple of years down the road.
Home prices would drop to 75% overnight in the U.S. if mortgages weren't available, since the majority of Americans live paycheck to paycheck and have $0 Net Worth. Cash-rich investors would buy everything up and rent to the cash-poor masses.
bubblesitter
2010 Nov 5, 5:50am
Housing always goes up. Thanks for asking.
If housing is gonna go up like crazy than we’ll have the third world country kind of life style, because people won’t have much money left for everything else other than paying mortgage.
For the most part, people in third world countries don’t use mortgages. They add-on to their house little by little with whatever cash they can save.
Most people in Mexico first lay down the foundation one year, then next year they’ll build the living room/bedroom, then a couple of years later, they’ll build a kitchen. All around the country you see half-built homes and even rooms with the concrete block walls made, but missing a roof since they’re still saving for that part a couple of years down the road.
Home prices would drop to 75% overnight in the U.S. if mortgages weren’t available, since the majority of Americans live paycheck to paycheck and have $0 Net Worth. Cash-rich investors would buy everything up and rent to the cash-poor masses.
My point is, if inflation picks up fast without incomes catching up with it the US middle class will be in very tight spot.
Home prices would drop to 75% overnight in the U.S. if mortgages weren’t available, since the majority of Americans live paycheck to paycheck and have $0 Net Worth. Cash-rich investors would buy everything up and rent to the cash-poor masses.
However, this actually wouldn't happen, because if there were no mortgages, there wouldn't be many cash rich investors. It requires somebody to be in debt on the other side of the bank's balance sheet in order for somebody else to have a cash balance at the bank.
Mark_LA
2010 Nov 5, 7:07am
Home prices would drop to 75% overnight in the U.S. if mortgages weren’t available, since the majority of Americans live paycheck to paycheck and have $0 Net Worth. Cash-rich investors would buy everything up and rent to the cash-poor masses.
However, this actually wouldn’t happen, because if there were no mortgages, there wouldn’t be many cash rich investors. It requires somebody to be in debt on the other side of the bank’s balance sheet in order for somebody else to have a cash balance at the bank.
I agree with you, but only by modifying your statement to read "there wouldn’t be many NEW cash rich investors."
There's millions of "millionaires next door" with $1 million+ net worth in the U.S. These cash rich investors would buy homes for $100k cash that rent out for $2,000 per month. In less than 5 years, they would get their initial investment back, then in the next 5 years earn another $100k from the renters. They would then use that $100k to buy another property.
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Property prices wouldn't increase much, since all the financed buyers would be marginalized, preventing them from bidding up home prices. The opposite of what happened in from 2002-2006, when anyone with a pulse qualified for a loan and were able to bid-up home prices to bubbly levels.
The renters would face a big hurdle in becoming future home owners: how can they save $100k when they're giving $2k/month in rent to the landlord & there are no 30-year mortgages available?
There you have the explanation for the huge income disparities in third world countries like India and Mexico. The richest man in the world lives in Mexico, while it takes the common man there 3 years to save up to build 4 walls for a room.
There you have the explanation for the huge income disparities in third world countries like India and Mexico. The richest man in the world lives in Mexico, while it takes the common man there 3 years to save up to build 4 walls for a room.
I agree. The lack of a working credit system is a huge part of what distinguishes rich countries from poor countries.
With the recent announcement by the FED to print $600 billion dollars and release them into the system it seems that the FED is determined on destroying the dollar in an attempt to stimulate inflation and get the economy moving again. I heard an interesting projection made today from a guy by the name of Steve Peasley on KDOW predicting that housing prices will inflate as the dollar gets crushed eventually causing housing, stocks and commodities to increase significantly in the next few years. I would like to hear the boards comments as to what effect you think QE2 will have on housing prices in the next 2 to 5 years.
#housing