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New Federal Reserve Stimulus Helps Housing

Biblical accounts of the wise King Solomon remind us that the King was concerned with the just administration of his realm, ensuring prosperity for the forty years of his reign. Solomon advocated prudence and wisdom in all actions for the benefit of the kingdom as a whole. And he wasn’t slow in taking steps to keep the kingdom stable and strong. Now, as policymakers haggle over the “fiscal cliff” facing the US budget, the Federal Reserve is announcing new initiatives that it considers prudent and wise steps to shore up the fragile economic recovery and stimulates the labor and housing markets.

One reason for the Fed’s continued activity in this area is concern over the slow labor market as well as the state of the housing recovery. According to a 12/12 Reuters article, policymakers believe that infusing the economy with new money should stimulate hiring and overall consumption, which in turn will boost the recovery. And, some believe lower interest rates and better terms for refinancing homes and investment properties should free more money for other uses.

This move is only the latest in the Fed’s attempts to boost the economy via purchasing securities. The previous round, called Operation Twist, is now drawing to a close without achieving the economic jump start its creators had hoped for. So officials are now replacing it with a new plan to buy an additional $45 billion per month.

In addition to this new buying initiative, the Fed is expected to continue with its ongoing effort, begun in September 2012, to buy $40 billion monthly in mortgage-backed securities. According to the Fed’s most recent policy statement, the plan is to maintain a monthly asset purchase of $85 billion as long as it deems necessary.

The Fed’s efforts to circumvent economic crisis began in 2008, at the start of the notorious housing collapse. That year, the central bank cut overnight interest rates to nearly zero. It has bought about $2.4 trillion in securities to try to push borrowing costs to even lower rates, and these new efforts come as policy makers in Washington continue to wrangle over budgetary issues.

Will the Fed’s strategies work? So far results have been mixed. The economy remains slow, but the housing industry has begun a slow recovery. In September 2012 the Fed expected the economy to expand by 2.5 percent to 3 percent in 2013 but some officials are calling that outlook far too optimistic.

But the Fed continues on with its plans to buy mortgage-backed securities, and that means that interest rates will most likely remain low until at least mid-2015. Although the effect of this buy-up on the economy as a whole remains to be seen, the implications for income property investors working with Jason Hartman’s investing strategies are clear: at lest for the next few years, mortgage interest rates should remain at their historic low levels, making this a good time to finance or refinance residential real estate.

The Solomon Success Team


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