Overview on Monetary Policy and how it Affects Home Sellers & Buyers

In 2015 the central bank (in USA) began tightening the money supply and has continued to do so ever since by raising interest rates and selling treasury bonds aka the Fed shrinking their balance sheet. Essentially this allows banks to provide loans at a higher interest rate. 

During (2008) and a time period after the Great Recession (until 2015)- the Federal Reserve had interest rates at 0% and at this time the Fed also bought US treasury bonds (quantitative easing). Thus, the money supply was loose which allowed many loans to be cheap in terms of low interest rates. This allowed the USA to get out of the Great Recession but this has many repercussions if quantitative easing continues for too long.

The Fed currently (as of July 2018) has interest rates at 2% and they say it will continue to rise in order to fight/mirror inflation. Now that the Fed has been raising interest rates for 3 years now, several central banks in the world are now raising their interest rates. 

Here is a link regarding some international banks raising their rates- https://www.wsj.com/amp/articles/following-the-fed-central-banks-are-ready-to-raise-rates-1532022102

"Many investors worry that the end of ultra-low interest rates and other monetary stimulus will remove a critical support that’s lifted markets since the financial crisis." - https://www.wsj.com/articles/global-central-bank-chatter-rattles-bond-market-1532382836

Higher interest rates from the Fed makes loans such as personal loans from the bank, credit cards and auto loans more expensive. Therefore, this makes people in general have a tighter budget so it can affect home buyers in terms of their FICO score and savings for a down payment. Thus, this is how the Fed can affect the real estate industry.

Now in regards to what makes mortgage loans more or less expensive and in terms of the history on Fed interest rates, please visit- https://www.youtube.com/watch?v=aSpBK_9qus8





Andrew Vargas