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The Campbell Real Estate Timing Letter

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2.2.2. The Adjustment phase This is the period after QE ends when the inflation rate reverts back to its natural level since it is not actively controlled by central banks. In the adjustment phase, increasing consumer and asset prices raise the demand for money balances and the supply of long-term assets. Thus the initial imbalance in money and asset markets lessens, and real asset prices begin to fall back. The boost to demand diminishes as a result and the price level continues to increase but by smaller amounts. The entire process keeps going until the price level has risen sufficiently to restore real money balances, real asset prices and real output to their equilibrium levels. Hence, asset purchases should accelerate the return of the economy to equilibrium from the situation of deficient demand. …show more content…

Campbell expressly discussed the impact of mortgage rates, a critical factor of the U.S. economy: “Even though mortgage rates had been in a long-term downtrend since 1982, a substantial body of empirical research has found that the Fed’s massive bond buying purchases since 2008 has significantly lowered mortgage rates and long-term Treasury yields. Hence, without QE mortgage rates could likely be 2.0 to 2.5 percentage points higher than they are today – which means most of the people who made money in real estate in the last 3-4 years would not have done so if housing prices weren’t driven higher by artificially low mortgage rates.” Campbell suggests that the bull market in housing may also soon end with the end of QE because of the weaken purchasing power of mortgage owners thanks to growing mortgage rates. However, mortgage rates still kept sinking and it had lasted quite a while longer before the Adjustment phase drives them higher from mid-2014 (See Figure A.2 in

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