Question

Describe how U.S. interest rates have been affected by the domestic housing market over the past year. What do you think has affected interest rates the most? (1-2 page response)

Answer 1

The interest rates are determined by 3 main forces The first is the Federal Reserve, which sets the fed funds rate. That affects short-term and variable interest rates.The second is investor demand for U.S. Treasury notes and bonds. That affects long-term and fixed interest rates. The third force is the banking industry. It offers loans and mortgages and can change interest rates depending on business needs. After the housing boom in early 2000s the housing market is a big constituent in determination interest rate.

Federal law states that banks needed to keep a minimum quantity of money available. This is often referred to as the reserve demand. But bank balances aren’t constant, as customers deposit or withdraw their money. As a result, banks generally have to be compelled to borrow cash from different banks, overnight, to satisfy their reserve demand. The federal funds rate is that the rate that banks charge different banks for these long loans. The financial organization of the u. s., the FRS, aka the Fed, is answerable for setting the federal funds rate. once the FRS changes this rate, it impacts everything from employment to the assembly and value of products and services. Banks cross-check the federal funds rate once setting the interest rates they charge their customers. The prime rate is that the rate that banks charge their most qualified, credit-worthy customers (usually stable businesses). this is often determined by every individual establishment, usually around three p.c on top of the federal funds rate. When the Fed lowers the federal funds rate, banks will access cash additional cheaply, and that they will pass those savings to their customers via lower interest rates. Cheaper borrowing spurs additional home shopping for and business growth. This creates higher demand for a few merchandise and services, from construction materials to furnishings to appliances, that results in additional jobs and production.Conversely, once the Fed raises the federal funds rate, banks raise the interest rates they charge customers. This dampens the passion for borrowing, which can mean fewer individuals purchase homes or expand businesses.

When individuals purchase or sell homes, either to measure in or as associate investment, we have a tendency to discuss with this because the housing market. A home is the foremost valuable factor many folks can ever own.
The housing market is closely connected to shopper disbursement. once house costs go up, owners become at an advantage and feel additional assured. Some individuals can borrow additional against the worth of their home, either to pay on merchandise and services, renovate their house, supplement their pension, or pay off different debt.

When house costs go down, owners risk that their house are value but their outstanding mortgage. individuals area unit thus additional possible to chop down on disbursement and hold aloof from creating personal investments.

Mortgages area unit the best supply of debt for households within the America. If many folks do away with massive loans compared to their financial gain or the worth of their house, this may place the industry in danger in associate economic downswing.

Housing investment may be a little however unpredictable a part of however we have a tendency to live the full output of the economy. If you get a fresh designed home, it directly contributes to total output (GDP), as an example through investment in land and building materials moreover as making jobs. The native space additionally profits once new homes area unit designed as newcomers can begin victimization native retailers and services.

Buying and commerce existing homes doesn't have an effect on gross domestic product within the same manner. The attendant prices of a house group action still profit the economy, however. These will embody something from land agent, legal or surveyor fees to purchasing a brand new lounge or paint.