This research reviews the current real estate market in the United States. Economic, legal, and political factors affecting the market are considered, as are industry trends.
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 interest rates through the development and implementation 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 more immediate impact on interest rate levels. In the fall months of 1991, the Federal Reserve acted on more than one occasion to lower interest rates in the American economy.
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