The U.S. Federal Reserve has decided to buy more mortgage-backed securities from Freddie Mac and Fannie Mae and this decision could have an impact on investors, as well as the housing market. The plan involves buying $40 billion in mortgage-backed securities per month to drive a recovery in the real estate market. The purchases will continue until economic conditions in the U.S. improve.
This quantitative easing could contribute to better yields for riskier assets over the short term of the next few months. When the Fed bought long-term U.S. Treasury bonds in 2010, prices of equities, commercial backed securities and other high-yield bonds increased by 12-25 per cent.
Analysts at Fitch ratings are predicting that the Fed’s move could be a positive development for real estate investment trusts (REITs). If the new plan results in a decline in long-term Treasury rates or maintains them at their current levels, they anticipate a drop in overall borrowing costs for REITs will follow. Lower rates could also encourage investors to allocate more of their respective portfolios to REITs.
Commercial real estate prices have changed since the last time this strategy was used, and it may be more challenging for investors to get the same kind of yields they were seeing in 2010. If the investment in mortgage-backed securities resulted in investors being able to expand their businesses, the benefits would impact the commercial real estate market in a more direct manner.
Demand for office space would increase, leading to more hiring and higher consumption levels. Retail and warehouse spaces would benefit from higher demand, which would be good news for investors. Long-term, stable tenants mean regular income for investors and this prospect may be enough to encourage new players to enter the U.S. market.
