Home » News » Why real estate housing in the US does not pay heed to Federal Reserve?

The Federal Reserve has always tried it’s best to maintain a controlled monetary policy in the US. With time, they have inflated the interest rates on almost everything, from mortgages to corporate bonds, saving interests. In the beginning, the policies of Federal Reserve didn’t pay off well when it started almost 100 years back. The Great Depression in 1917 was analyzed by economists, who confirmed the reason of this deflation was Fed’s implementation of interest policies in an abrupt manner without a proper market scrutiny.

The effect of monetary deflation

  • More than 25% of the people lost their jobs.
  • This greatly increased the market rate of interest as the supply of money fell almost by 30%. The most affected sector was the real estate.
  • More than 75% drop was there in the construction of houses and buildings.

The reason behind Federal Reserve’s interest rate changes

The further monetary crash in 2007 shrunk the number of appraisers in real estate by 22 percent. This created a great sense of disregard among people in the US for Fed’s real estate interest policies. To overcome that and maintain its reputation, Federal Reserve altered their real estate interest plans and procedures. Focusing on this sector was their primary concern because; it is one area where evaluated property rate has a lower chance of going down.

According to economists, the reason behind is a stronger currency value of the US. The new idea that they started implying to generate more revenue was by maintaining a stable interest rate. Their new motto was ‘Easy Money’ by keeping the housing mortgage and loan rates less, which will give way to an inflated return by involving more loan seekers and investors.

Present Scenario

Federal Reserve’s involvement into monetary policies regarding real estate is not much botheration to investors or people involving into property mortgage. For a fact, this new change is working in a positive way for Federal Reserve.

  • 2008 was the year from which they have started charging low interest rates. Charges against property mortgage for 30 years went down to 4%- 6%. This kept borrowing cost low for purchasers causing a great inflation in home sales percent.
  • In 2011, the total real estate sale evaluation was around 4.6 million.
  • In 2013-14, it went up to 5.4 million.
  • This year, in 2016 the estimated value is of 5.7 million or more.

Assuming that Federal Reserve will raise their rate by a percent point every year, even then the 30-year mortgage gist would be 3.9% to 4.2%. If a typical house price in the US is around $230,000, then inflated mortgage price will value around $30 to $1500 per month which will not dissuade property buyers or investors.

It can be concluded that, real estate housing doesn’t have to pay much heed to Federal Reserve if there is a steady employment and growth rate. Then the US income will increase proportionally to market impact. There might be a price boost of 5% this year which will have an estimated of 4% by the end of 2016.

The increment of interest charges for this will be so nominal that real estate will not be much affected by Federal Reserve’s interest rate changes.

by Duncan Wierman

Founder Boston Real Estate Investors Association

Photo by DerFussi