Monetary & Fiscal Policy & the Real Estate Industry

Monetary & Fiscal Policy & the Real Estate Industry

This research examines the effects on the real estate industry of monetary and fiscal policy in the United States (US). For purposes of this research, a broad definition of the real estate industry is employed. This definition covers real estate property sales to end users (homeowners, industrial firms, and so forth), construction (public and private), and real estate investment.

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 more immediate impact on interest rate levels.

In the development and implementation of fiscal policy, both the President and the Congress, also, can affect interest rate levels. Heavy deficit spending, which has occurred at historically high levels since the advent of the Reagan presidency, places pressures on the capital markets, which, in turn, often lead to interest rate increases.

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 inte…

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