The Federal Reserve Bank has raised interest rates more than 15 times over the past two years, and Realtors are feeling the pinch. Home sales have slumped all over the nation, and blame is being placed squarely on interest rates.
In June Ben Bernanke, Federal Reserve Chairman said that core prices had increased 2 percent. No one except the Fed seems to think that we are in any danger of runaway inflation. The greater fear is that higher interest rates will lead to loan foreclosures as popular variable rate mortgages written in the past few years are repriced. Real estate agents and lenders are not the only ones affected by rising interest rates. Businesses that depend on borrowing will find their expenses climbing, which will lead to pay cuts, layoffs and pullbacks in operations if interest rates don?t level out.
Many young home buyers have opted for variable rate mortgages, betting that their incomes would increase before the interest rates on their homes. Rising rates will put many young families at risk of losing their homes. Americans place a high value on home ownership, believing it leads to stability in our society.
Some have cast blame on rising rents for fueling inflation, but the truth is, rents have been stagnant for years. Young families normally rent for a few years as they save for their first home, but in the past few years they have borrowed from relatives and used every creative financing trick in order to buy their first home while rates are low. This has left many landlords wringing their hands over empty apartments and rental homes. The predictable result was a lowering of the price of rental housing. Now that home sales have slowed, rental housing is filling up again, and landlords are cautiously making long overdue adjustments to rent.
Actually, inflation is not caused by any industry or market raising its prices. Inflation is a growth of the money supply caused by increased lending. The symptom of inflation is increased prices as too many dollars chase too few goods. The Federal Reserve controls the amount of currency in circulation by raising and lowering interest rates. When interest rates are low, business and consumer demand for loans increases, and banks ?create? new electronic money by making loans.
The Federal Reserve attempts to grow the money supply at a rate matched to the growth of the American economy, so that prices do not increase or decrease.
The current higher interest rates are having a damping effect on real estate sales today, but the low rates of the past are also reaching forward to affect sales today. That is because many buyers bought early to take advantage of low rates while they lasted. If home sales were the only consideration, the Fed would not have raised interest rates this far, this fast.
Real estate agents are optimistic that the current sales slump is just a temporary hiccup that will pass as the market adjusts to current conditions.
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