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Fed policy hinders home sales

September 10, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

The Federal Reserve governors' decisions to keep mortgage rates artificially low are hindering new home sales. Sound crazy? Isn't it true that lower interest rates, the price paid for money, cause people to buy more? Absolutely not! Here's why this policy isn't working.

I worked in the homebuilding and mortgage banking sectors for roughly 10 years of the 17 that I was in corporate America. Sales of new homes surged whenever the Fed raised interest rates and the public's perception was that rates were going even higher. An interest rate hike coupled with the anticipation of more rate hikes creates a sense of urgency to buy now, before interest rates go up again.

I know that's counter-intuitive, but if the Fed wants to create greater demand for new homes and trigger a rebound in the housing market it needs to embark on a program of raising rates. Those buyers who are sitting on the sidelines, whether it's because they believe that rates may go lower (given the Fed strategy who wouldn't) or because there's no imminent threat of higher rates, will suddenly accelerate their plans to buy or build a new home.

There's a lesson here for your business as well. When sales seem to be lagging, create scarcity. Just don't use limited time discounts to do so.

About Dale Furtwengler

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