Monetary & Fiscal Policy & the Real Estate Industry

Monetary and fiscal policies affect the real estate industry in a variety of ways. Further, a single policy action may produce conflicting results.

The great majority of private real estate construction and sales are financed through the issuance of mortgage loans. Thus, the level of mortgage interest rates tends to exert an almost immediate and a meaningful impact on real estate construction and sales. Higher interest rates reduce the pool of potential real estate pruchasers who can qualify for a mortgage loan, and cause other potential buyers to drop out of the market because they are unwilling to pay the higher costs.

The Federal Reserve can exert a significant influence on the level of interest rates through the development and

1 2implementation of monetary policy. Through manipulation of the money supply, the Federal Reserve can cause interest rate changes on a somewhat delayed basis. Through the setting of the discount rate and the interbank borrowing rate, the Federal Reserve can exert a

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tarts Change (000s)    1970 1434  5.0% 1972 2357 +64.3% 1974 1338 43.3% 1976 1538 +14.9 1978 2020 +31.3% 1980 1292 36.1% 1982 1062 17.9% 1984 1749 +64.6% 1986 1805 + 3.2% 1988 1488 17.6% [sources: Standard & Poor's, 1989; Standard & Poor's,1988; Council of Economic Advisers, 1989] =============================================================== In the early1970s, the Federal Reserve loosened the money supply, and President Nixon and the Congress increased federal spending, in policy actions designed to stimulate a depressed economy. The actions provided significant boosts for real estate construction and sales. In the mid1970s, the Arab
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Approximate Pages = 9 (250 words per page)

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