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In: Economics

the benefits of lowering interest rates would be to raise the investment in residential houses. Do...

the benefits of lowering interest rates would be to raise the investment in residential houses. Do you think there could be a risk to this of inflating housing prices like we saw happen in the first half of the 2000s.

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Expert Solution

Several different variables can affect interest rates, but the four most impacting are inflation, the Federal Reserve and supply and demand for bonds. When inflation occurs, investors believe they have less purchasing power, eventually forcing interest rates to increase to make up for price change. Likewise, the Federal Reserve operates to keep the economy steady, sometimes allowing rates to fluctuate. Moreover, if the bond markets are witnessing a dramatic increase or decline in supply, this may lead to higher interest rates. Each of these can cause rising and falling interest rates, ultimately influencing consumer trends and the value of real estate.

In the end, mortgage rates have a direct impact on the prices of real estate. Essentially, with interest rates increasing, cash flow loses its value, triggering higher real estate prices. Another way to look at this is by lowering the interest rate, lowering the expectations for returns, making real estate more attractive to investors. Besides the price of a new home, rates can also have an impact on what types of mortgages potential homebuyers can secure, affecting the whole housing market.

Rahul Sunny answered 7 months ago
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