How Interest Rates Affect Housing in the USA

Central banks, or in the case of the United States, the Federal Reserve tends to change interest rates periodically to help balance the economy. The Federal Reserve raises rates when the economy is perceived as too strong and when growing too fast. Other times the Federal Reserve raises interest rates as a weapon to combat inflation.

Essentially the Federal Reserve changes interest rates periodically to make sure growth doesn’t occur too fast or too slow. They prefer steady growth over time.

When the economy is growing at too fast a pace, such as in the late 1990s, the Fed raised rates. This is done to make sure asset bubbles and inflation doesn’t go wild and end up threatening future economic growth.

During times when inflation is anticipated, the Federal Reserve raises interest rates to combat inflation. By doing so, they are actively discouraging lending, and business and consumer spending, and investing. This is meant to keep the U.S. Dollar strong as opposed to other assets and commodities.

When the economy is facing a recession, the Federal Reserve tends to lower interest rates. This is done to restimulate the U.S. economy by encouraging lending, spending, and investment. With lower interest rates, borrowers will be required to pay back less interest and borrowing becomes more attractive.

Interest rates tend to influence a wide range of financial products and services beyond the mortgage markets.