CA_Principles_09[1]

CA_Principles_09[1] - Principles of California Real Estate...

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1 Lesson 9: Principles of Real Estate Financing Principles of California Real Estate Economics of Real Estate Finance » For a lender, a loan is an investment. The interest paid on the loan is the lender’s return. A riskier loan requires a higher rate of return (a higher interest rate). Economics of Real Estate Finance Real estate cycles » Real estate cycles: Periodic shifts in the level of activity in the real estate market Caused by changes in supply of and demand for mortgage loan funds. When supply of mortgage funds high, interest rates low. When funds are scarce, interest rates high ( tight money market ).
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2 Economics of Real Estate Finance Real estate cycles » Real estate cycles follow the law of supply and demand . Housing prices go up when demand is high and supply is low. Housing prices go down when supply is high and demand is low. Economics of Real Estate Finance Interest rates and federal policy » The federal government influences real estate finance, and the rest of the economy, through: fiscal policy monetary policy Interest Rates and Federal Policy Fiscal policy » Fiscal policy: government spending taxation debt management » Set by Congress and the President, through legislation and the federal budget (and national debt).
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3 Interest Rates and Federal Policy Fiscal policy » Government overspending creates a deficit . To cover deficit, U.S. Treasury borrows money by selling interest-bearing securities to private investors. Securities can be issued for six months or less (Treasury bills), up to 10 years (Treasury notes) or 30 years (Treasury bonds.) » Increased federal borrowing means less money available for private sector investment. Increase in federal deficit usually makes interest rates rise. Interest Rates and Federal Policy Fiscal policy Interest Rates and Federal Policy Monetary policy » Monetary policy : Federal government’s control of money supply and interest rates . Monetary policy determined by the Federal Reserve (“the Fed”). Major goals are economic growth and stability in interest rates and markets.
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» Federal Reserve sets monetary policy using these adjustment tools: key interest rates reserve requirements open market operations Interest Rates and Federal Policy Monetary policy Interest Rates and Federal Policy Monetary policy » Key interest rates : The Federal Reserve sets: federal funds rate discount rate » These are the interest rates charged when a bank borrows money, from another bank or from Federal Reserve. » If the Fed raises interest rates, banks also raise the rates they charge their borrowers. » If the Fed lowers interest rates, banks adjust their interest rates. Lower interest rates usually stimulate the
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This note was uploaded on 09/06/2011 for the course FI 365 taught by Professor Staff during the Spring '11 term at S.F. State.

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CA_Principles_09[1] - Principles of California Real Estate...

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