FED announcement
This morning the Federal Reserve announced its continued stimulus of the US economy by affirming a commitment to purchasing $40 Billion a month of mortgage-backed securities and re-investing the returns off of previous investments by purchasing another $45 Billion in similar securities. This amounts to an $85 Billion-a-month pledge and it is open-ended until it's satisfied that economic conditions have improved. Additionally, on the call, it announced that it plans to keep the Fed funds rate at essentially zero and intends to keep it there through at least mid-2015. What does this mean? Well, it is evident that the Fed believes the best impact on job growth and economic recovery is at least partially through the housing market which is continuing to recover. In short, the more people that stay out of foreclosure… the better for the overall economy. The more people that can refinance their existing mortgages into lower payments, the more money they have to spend elsewhere. The lower rates also are an encouragement for consumers and businesses to lever up, borrow more and invest in growing their companies, buying assets, etc. The 2015 forecast is a message that you will have this window of opportunity for another 3 years! How do I profit from this? If you have a mortgage that would be lower at today’s rates you should consult a lender and see if that would make sense. If you want to up-size your home you should call us and see what your money can buy and what your current home could sell for. Increase your leverage if you are comfortable with the payments and purchase more real estate or other assets that you think will appreciate or cash-flow at a rate higher than the cost of those funds. Future inflation? Many are predicting that the longer term outcome of this is much higher inflation. I have been talking about this for a while. If this happens, you want to own real estate. Real estate is an inflation hedge for several reasons: 1) Your payments are fixed. If you have a $2,000 a month 30-year fixed mortgage, that payment is unchanging for 30-years. If inflation occurs, the dollar will weaken and the costs of goods and services will go up in price but you might not care as your income should also be rising in that environment. However, the mortgage payment you have does not inflate with the cost of everything else. It is fixed so you might be paying back that mortgage with “75 cent dollars” (your devalued dollars). 2) Rents are NOT fixed. This means that while your payments are fixed for 30 years and not subject to inflation…your rents are not. So you would be increasing your rents to your tenants on your investment properties and widening the gap between your income and your expenses…otherwise known as “profit!” Author: Trevor Benn (R, GRI, ABR, ePRO, SFR) Principal Broker - Benn Pacific Group Inc. *DISCLAIMER
