REAL ESTATE MARKET

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 purchasers 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.

In 1991, mortgage interest rates fell to their lowest levels in several years. In the wake of falling rates, one would have expected a sharp rise in housing sales. What actually occurred, however, was a sharp rise in the refinancing of existing mortgages that had been initiated in the higher interest environments of the past few years. Housing sales did rise, but not at the levels that would be expected from substantial declines in interest rates. Housing sales continued to be inhibited to a significant extent by the continuing economic recession in the United States.

The Federal Reserve can exert a significant influence on the level of in

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licy actions designed to reduce the budget deficit may be viewed as positive factors for real estate construction and sales, because such actions tend to moderate both interest rate actions and price inflation. Conversely, however, such actions also often produce other outcomesùlower levels of government employment, lower levels of employment in the defense supply industries, and lower federal construction spendingùwhich are detrimental to real estate construction and sales. Similarly, fiscal policies designed to boost employment levels are positive for real estate construction and sales in the context of employment levels. Such policies, however, also tend to accelerate price inflation, a factor detrimental to real estate construction and sales. Fiscal actions related to taxation also affect real estate construction and sales. Policies permitting mortgage interest rate deductions when calculating federal income tax liability, as an example, provide incentives for real estate investment. Conversely, policies limiting mortgage interest deductions for some type of real property, and policies substantially increasing the time over which real property investments must be depreciated (both of which were included as provisions in t
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Approximate Word count = 1625
Approximate Pages = 7 (250 words per page)

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