The second way that the Federal Reserve Bank sets Monetary Policy is through the expansion and/or contraction of the money supply. Currently the policy is to expand the money supply by many of billions of dollars per month. This is often termed “printing money” and is accomplished by contracts the Federal Reserve Bank sets up with the United State Treasury Department through the buying and selling of bonds, where money is really created out of thin air. This monetary policy can lead to inflation as has happened many times in the past. The main reason that consumer prices have not currently increased is due to the continuing effects of the recession and the anemic economic recovery that the economy is experiencing. Interest Rates.
In the near future interest rates will begin to rise from their historic lows and the demand for real estate will decrease which will put downward pressure on home prices. If money supply policy continues unabated (The Fed continues to pour billions into the economy), inflation could rear its ugly head which historically leads to higher real estate prices. When the two opposite forces are compared, the drop off in demand due to increased interest rates should more than offset the inflationary pressure on real estate prices.
Our conclusion is that while real estate prices are currently going up there appears to be a ceiling that will be determined on any increase in mortgage interest rates.
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