Home Values Likely to Decline When QE3 Ends

Sales of previously occupied homes have hit their second-highest peak of the last three years, reports Reuters. Federal Reserve Chairman Ben Bernanke, certain that the economy is improving, has now proposed bringing the current round of quantitative easing, or QE3, to a close.

Every month since last September, the Fed has purchased $85 billion in mortgage-backed securities and US Treasurys, according to the Reuters report. The program was meant to encourage more mortgage lending by banks and lower unemployment numbers. It has also boosted the housing market.

It has made an impact. The average home prices in 20 metropolitan markets has increased by 8.1 percent during the last year. These increases represent the highest gains in the market since the summer of 2006, the peak of the housing boom. However, current prices are still only 70 percent of their 2006 averages. Robert Oak of the Economic Populist argues that these numbers have been artificially inflated by the Fed and that they will burst as soon as the Fed ends this round of quantitative easing.

The U.S. housing sector typically encompasses 18 percent to the nation's gross domestic product, according to the National Association of Homebuilders. Thus, QE3 has had a significant impact, not only on the housing market, but on the rest of the economy.

Both the S&P 500 and the Dow have hit record highs in the last five months, and only once in the last year has the S&P 500 closed at less than its 50-day moving average, notes CNN Money. However, the positive performances of these indexes may be in jeopardy as traders balk at the Fed's proposal to end QE3. Worried that the stock market will lose one of its most essential pillars, traders are amplifying their concerns in the markets.

Confident that the economy can continue to improve without QE3, in spite of traders' concerns, Bernanke may be interested in stopping the program sooner rather than later. His colleagues, on the other hand, are arguing for a continuation of the program until the economy hits a few milestones. Chicago Fed President Charles Evans says the program should continue until the labor market shows consistent gains of at least 200,000 jobs per month. San Francisco Fed President John Williams wants to continue QE3 until unemployment falls below 7.5 percent, GDP grows by another 2.5 percent, and inflation stays below 2 percent, Reuters reports. Other Fed presidents are calling for even more evidence of growth before they will entertain the thought of ending the program.

Whether or not QE3 will end quickly is still undecided, and market watchers have been glued to their Google Nexus from T-Mobile smartphones waiting for the Fed's final decision. As they wait, countless analysts are speculating what a QE3 demise will mean for the economy in general.

Nick Eliovits of Seeking Alpha asserts that removing the program will cause interest rates to rise and buying power to decrease. He anticipates an appreciation of the dollar which will make US exports less attractive to foreign markets and may even cause foreign investors to liquidate their US equities. He also projects that the increases in housing prices will come to an abrupt stop and that they could even start to spiral downward again. Whether the economy is on the upswing or on the precipice of a cliff is still undecided, and only time will tell whether it is falling or climbing.

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