The Investment Scientist

QE3 and your investment, mortgage, money etc.

Posted on: September 20, 2012

Last week, the Fed announced another round of quantitative easing (QE3).

This time around, they plan to buy $40 billion worth of mortgage-backed securities with created money until the employment picture improves.  Compared to QE1 and QE2, QE3 is open-ended.

How does this affect your personal finances?

I believe there are a number of major effects.

Stock prices will be artificially elevated in the short term. In fact, the anticipation of quantitative easing may have already lifted stock prices from their usual summer doldrums. If you have cash sitting on the sideline, you would be better off investing it yesterday!

Mortgage rates will likely stay low. When the first round of quantitative easing started three and a half years ago, the average 30-year mortgage rate was close to 6%, now it’s down to 3.5%. I am in the process of refinancing a 4.65% 30-year mortgage I took out last year. You know what rate I have locked? 3.65%! I chuckle at the fact that my borrowing cost is half that of Italy and Spain, thanks to the Fed’s actions.

Housing prices will likely go higher because low mortgage rates ultimately make homes more affordable.  We will likely see the recovery of housing prices accelerate. Now is a great time to buy real estate properties, either for self-use or for rental.

Money will be worth less. There are people who are so fearful of investment after 2008, they stuff all their money in their mattress. It is a costly mistake. The money in the mattress will lost 3% of its value every year. In ten years, it would lost 30% of its value.

Precious metals will likely rally. That’s just the corollary of money being worth less.

In summary, if you have stock investment or you have a house with a mortgage, you are a winner. On the other hand, if you are sitting on a stash of cash, you need to schedule a meeting with me.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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