QT and Real Estate - Here's a shoutout to one of our loyal readers, whom we will just call Phil. He sent us an interesting question and hypothesis regarding QT's effect on the housing market.
Phil's theory is that QE propped up the housing market by decreasing the bond supply and driving investors into real property with similar risk profiles to the bonds they actually would have preferred.
Now, as QT increases bond supply, investors might pull their capital out of the real estate market and drive down RE prices.
We tend to agree with Phil's hypothesis, and we'd like to add some nuance.
Pulling money from real estate is challenging as RE as a financial instrument is not as liquid as bonds. Any shift in investor participant profile in RE markets won't happen overnight.
Interest rates will also do a great job slowing the housing market. When you are borrowing 700k at 2.6% versus 5.5%, your monthly payment is almost 50% higher on just the mortgage principal and interest. This will keep a ton of buyers on the sidelines at a given price point as well as shift their individual demand curves to cheaper properties.
From a liquidity perspective, there is an opportunity cost of investing in bonds. When the bond market has a significant $100bn increase in supply from formerly Fed-held bonds that otherwise weren't in the market, bonds might look more attractive.
As investors divert some of their capital to the bond market, we might see less money flow into real estate.
As we said, it won't happen overnight, but it is good news for potential Gen-Z homeowners with money to spend on a home.
Thanks for sparking the discussion, Phil.
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