the development and implementation of fiscal policy, both the President and the Congress can affect interest rate levels. Heavy deficit spending, which has occurred at historically high levels during the Reagan and Bush Administrations, places pressures on the capital markets, which, in turn, often lead to interest rate increases. When one considers that interest rates fell in 1991, it might appear that the relationship described was not working. In fact, however, it was nominal interest rates that fell substantially. Real interest rates in the American economy remained high. High real interest rates are particularly detrimental to commercial real estate development, which has suffered badly in the current economic recession.
Price inflation and employment levels also affect the level of real estate construction and sales. Price inflation acts in a way similar to that of interest rate increases. On the one hand, higher costs reduce the pool of potential buyers who can qualify for a mortgage loan. In actual fact, such buyers could qualify for mortgage loans, if they were either able or willing to pay the increase costs for property up front as higher down payments. In most instances, the affected buyers are neither able nor willing to make such up-front payments. On the other hand, many potential buyers drop out of the market because they are unwilling to pay the higher costs. Higher levels of unemployment reduce the pool of potential real estate purchasers who are able to qualify for a mortgage loan. The current economic recession has caused a substantial reduction in the qualified buyer
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