There was a lot of fuss last week about the Federal Reserve’s decision to extend its quantitative easing practice via an open-ended QE3 policy, this time buying mortgage-backed securities.
The idea, according to central bankers, is that maintaining a zero interest rate policy and pushing down yields by buying bonds will keep rates effectively near zero through 2014 and into 2015 — maybe even longer. That will spur spending since debt is relatively accessible at low interest rates (presuming you have the money to pay back a loan, of course) and the lack of return on interest-bearing assets likely will spur consumers to spend and businesses to invest.
For a practical example, consider that today a 30-year fixed-rate mortgage is available for a mere 3.5% interest rate — and a 15-year fixed is just 2.9%! That’s barely more than the current rate of inflation! This math means prospective homebuyers have a big incentive to get into housing now, and save tens of thousands over the life of their mortgage thanks to low interest payments.
That sentiment has been echoed by a report Tuesday that homebuilder optimism is soaring. The optimism is measured by the National Association of Homebuilders/Wells Fargo housing market index, which rose yet again to crest at a six year high. And why not, as we appear to see a bottoming in home values and hopes for more mortgage filings thanks to QE3?
Except it’s not that simple. There are some practical challenges the housing bulls have overlooked.
Consumers Can’t (or Won’t) Buy
The rate is affordable, true. But in metro areas housing prices easily top six figures even for a small condo. That means you need thousands or tens of thousands saved up to make a down payment, and a decent paying job to foot the monthly bill.
Unemployment is still 8.3% — a natural hurdle for anyone looking to make a mortgage payment. But a more practical impediment is simply having enough cash in the bank to get a down payment together and ink a mortgage in the first place.
Consider that the personal savings rate has been bled down significantly over the last two decades — with less than 5% of disposable income being socked away currently! While savings briefly jumped during the recession, it certainly didn’t stay there. That’s because many Americans have had to dip into their savings to survive, and others are deleveraging by paying down old debts. Why take on a new mortgage when you just got out from under your underwater home and are now focusing on paying down credit cards, student loans and the like?
American families clearly aren’t putting their money away for a down payment or anything else. The average family’s money is either going to basic living expenses in the urgent cases or towards deleveraging in the case of those who have enough to get by.
Lean Banks Can’t (or Won’t) Lend
Another issue is the fact that banks have had to lay off so much of their mortgage departments during the downturn that, even if there was a boom in qualified buyers banging on the table for a loan, there’s isn’t the staff to serve them.
Consider this report from FT.com, where banking insiders are quoted about the backlogs and bottlenecks — to say nothing of the banks reluctant to move rates down and give up some margin on the loan:
“’In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer,’ said one executive at a leading lender, who requested anonymity. ‘Originators are massively backlogged in terms of origination volumes.’
Steven Abrahams, MBS analyst at Deutsche Bank, noted that the yield on mortgage-backed securities fell more than 30 basis points after the Fed announcement.
‘Very little of that is likely to make it through immediately to consumers,’ he said. ‘There’s nothing that will force mortgage originators themselves to lower the rates that they’re offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy. There’s not a bunch of people on long cigarette breaks.'”
Builders are Booming, But …
I think the lion’s share of the rally is already behind the homebuilders (read more about how housing stocks risk a crash). Best case scenario is that they have outkicked the coverage, and that the stocks will move sideways as the much-anticipated sales start to come in over the next several months.
But a darker scenario is that they have built out too fast and that the rush to finally tally new home sales has resulted in an overeager industry and investors who jumped the gun.
This is a serious risk for those buying housing stocks — from PulteGroup (NYSE:PHM) to Ryland Group (NYSE:RYL) to Toll Brothers (NYSE:TOL) to D.R. Horton (NYSE:DHI) — but a bigger concern for the general public isn’t the profits of builders. The real concern is that if we are indeed seeing a recovery in housing… well, that doesn’t mean squat for housing jobs. Take a look at this chart.
Fundamentally, QE3 is designed to stimulate lending and spending and thus get the economy moving. And on the most basic metric of jobs created in an industry supposedly in “rebound,” this recovery falls way short.
That means you have to wonder whether there will ever be a dramatic recovery — in housing jobs, in housing prices and in housing sales.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.