The Federal Reserve & Real Estate

To keep inflation at the Fed’s target 2.0%, interest rates have steadily risen from the historic low of practically 0% in December of 2008 to their current 2.37%. This increase is due to the US economy’s growth which was fueled in part by the low interest rates after the housing crisis and recession of 2008. However, the recent trade disputes with China, Mexico and now India have many economists speculating a recession if the United States fails to make an agreement with these respective countries.

To combat the uncertainty and potential damage to US business, economists are arguing that the economy needs an “artificial stimulus” in the form of lowered interest rates by the Federal Reserve.  Fed Chair Jerome Powell recently said that the central bank would act “as appropriate” to address risks from the U.S.-China trade war, which thereby leaves possibility for a rate cut. There are even talks that interest rate cuts could be made as early as the third quarter of 2019.

These new lowered rates are expected to be anywhere in the range of 2.0-2.25 percent. Interest rates can significantly affect the cost of financing and mortgage rates which have huge influences on property values. The lowered rates will reduce the cost of funds, hence increasing amount of money circulating. This increased availability of money allows people to invest more money in real estate, influencing the supply and demand for property. The lower rates also mean that banks are able to make loans at higher loan to value ratios, which increases the leveraged cash flow and thus property values. Therefore the decision by the federal reserve later this year has the potential to turn the “lukewarm” housing market into a boiling pot or at least warm the water. 


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