Real Estate Basics-The Federal Reserve System

Posted by admin on August 1, 2010 under Real Estate License Basics | Be the First to Comment

A great deal of the real estate training to earn a real estate license will require you to have a solid understanding of real estate finance. At the core of the financial market is the Federal Reserve. In this edition of our Real Estate Basics series we will review what you will need to know about the Federal Reserve System.

The Federal Reserve is the central banking system managing the national economy. Many of the functions of the Federal Reserve System have a significant effect on the real estate market. The Federal Reserve can impact the real estate market with decisions that affect the cost of borrowing money. The ways the Federal Reserve controls the cost and ease of borrowing money are with reserves, discount rates, and the buying and selling of securities.

Reserves are the assets that a bank is required to keep on hand at any given time. If there is an increase in reserves, then a bank must keep an increased amount of money actually in their institution. This leaves banks with less money available to lend, triggering higher interest rates as loans are more difficult to get. When reserves are decreased, the banks are not required to keep as much money on hand, leaving them free to loan more funds. The increased availability of loans keeps interest rates down. It generally takes anywhere from 30 to 60 days before changes in reserves will affect the market.

Next is the discount rate; this is the interest rate charged to banks borrowing money from the Federal Reserve Bank. Unlike changes in reserves, changes in the discount rate are felt in the economy almost instantly. When the banks are charged and increased discount rate, it costs them more to borrow money, and that cost is passed on to the individual or business borrowing from the bank. Loans become more expensive and fewer people will be able to qualify. Decreasing discount rates makes loans less expensive and easier to qualify for.

The buying and selling of securities will also have an effect on lending, although it could take up to six months for it to affect the market. When the Fed buys more securities, interest rates go down and there is more money in the market. When they sell more securities, there is less money so rates increase making loans harder to get.

In addition to the decisions that can indirectly have an effect on the lending market, it is also the job of the Federal Reserve System to implement and oversee lending laws to protect consumers such as the Real Estate Settlement Procedures Act, Equal Credit Opportunity Laws and Truth in Lending.