Question

The Federal Reserve Bank (FED) is the single most influence on the cost of supply of money for real estate loans. It is the link between America's private financial institutions and the taxing and spending policies of the federal government. Please consider the last 5 years and in your opinion, how did FED perform in the recent financial crisis? Please focus more on the housing market for your answer.

Answer 1

Considering last five years trend for fed funds rate considering recent financial crisis, its rates were near zero in 2014 to till 2015 and started to increase from 2016 onwards and in its recent rate hike in December,2018 , fed funds rate is 2.25%-2.50%

But if trend is seen in mortgage rates then rates are almost stable and are above 4% but below 5% and now mortgage rates are 4.83% and in 2015 there were 4.09%.

It is to be worth noted that mortgage rates track the 10 year US treasury but as we can see when fed increases its funds rates these put effect on mortgage rates as well, it is because when it is expected that Fed will increase the funds rate then it will affect 10 year treasury since treasury will include the interest rate for 10 years from now and as mortgage rates follow 10 year treasury, so long term fixed mortgage rates will also include and consider today's and future years interest rates hike and that's why mortgage rates will increase accordingly.

So mortgage rates from 2014 to 2018 were almost stable and were following the trend of fed funds rate and this very low funds rate and stable mortgage rates has helped economy to spend more/increase in expenditure since this was increasing supply and demand for money and demand for mortgage loans, i.e. 30 year fixed mortgage loans and this coupled with government spending and recent tax cut by US president Donald Trump has helped the market to recover and grow and now unemployment is at record low and it is near to full employment level and new hiring is going on and this all is impacting demand for housing loans.