Archives for September 2012

Federal Reserve, Interest Rates, and Why It Is Hard to Buy/Sell a House Right Now

In my recent market report of Clovis, it showed that only 47% of houses listed this year have sold.  And out of those that sold, it took an average of 5-6 months to sell.  This, to me, spells a slow market.  The previous 4 years were all better than this year, with each year being worse than the last.

Many people want to know why?  If interest rates are reaching record lows, why is the market so slow? If the demand for housing is so high (especially with military coming into town), then why are houses not being sold/built?

While there are very complex answers to these questions, I am going to focus on how the Federal Reserve’s policies of keeping interest rates as low as possible have made the market where it cannot function properly.  This affects us all, even in Clovis, NM.

Federal Reserve Policies

Recently the Federal Reserve announced it’s plan to start QE3 (Quantitative Easing).  This is where the Fed creates money and releases it into the market. By doing so, it is able to keep interest rates at record lows.

Many people believe that if it weren’t for our low interest rates, our economy would be worse.  The opposite is true.  It is because of our low interest rates that our economy is so slow.

Why Low Interest has slowed our market down

Banks depend on interest payments for profitability, and low interest removes the financial incentive for banks to lend money in a normal way.  Because banks aren’t making much profit on their loans nowadays, they are very selective on who they lend to.  This makes it very hard for most people to get financing.  Have you tried getting a mortgage loan recently?  It is very tough, but only naturally because the low interest rates have made it that way.

In essence, the act of lowering interest rates hasn’t spurred economic activity, but rather stalled it.

Why Low Interest has hurt savers

Not only has low interest made it unprofitable for financial institutions to lend money, it is working against those who save money.  Low interest rates make it so savers have little to no return on their money.  Plus, the Fed keeps printing money (inflation), which causes all of our money to be worth less over time.  It used to be wise to save your money for a rainy day, but the Fed has seemingly waged war on savers.

With fewer and fewer people saving their money, there are less people who have enough money required to buy a house.

Conclusion

The Fed’s policies of low-interest and inflation have distorted normal market conditions.  They have made it hard for bank’s to lend money profitably, and savers to continue saving for the future.  In essence, bank’s are not lending to many people nowadays, and savers are harder to find to step in and purchase a house with their savings.

It is no wonder that the market is so slow in Clovis right now.  This is a problem that can be seen all around the country.

Photo Credit: “No Money” by Alina Sofia on Flickr.  CC Licensed.