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Economic Indicators Term Paper

Economic Indicators: Interest Rates and the Housing Industry Residential Construction Industry

Throughout the last century our economy and way of life as Americans was permanently altered as a result of governmental involvement and the development of finance options, such as mortgage rates never before seen in the residential construction industry. In the beginning of the 20th century, what seemed unattainable by homebuyers became a common expectation by that century's close. These expectations dealt with a consumer not only being able to build his own home, but more importantly being able to possess personal property, which represented, "comfort, convenience and quality of life unknown to previous generations" ("A Century of Progress," 2003).

Thus, the idea of affordable housing for middle-class individuals is actually a relatively recent American historical phenomenon and highly dependant upon financing. Some economists date the so-called typical American...

Regardless of the history of suburbia, however, home ownership has come to be perceived as a realistic aspiration for the average middle-class American.
II. Present

One of the aspects of the current 2005 housing market that has served to make housing more affordable, even to the point of many industry analysts speculating that there is a real estate 'bubble,' is the relatively low rate of interest for home mortgage loans, and the lower interest rates in general that have been adopted by the Federal Reserve to spur the formerly sluggish American economy after the recession of 2001 into its currently more robust state. (Isidore, 2005)

The lower the rate of interest, the more incentive there is for the consumer to borrow money to purchase…

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The lower the rate of interest, the more incentive there is for the consumer to borrow money to purchase a house. Lower interest rates in general also make it easier for consumers to purchase furniture, cars, and the other necessary accoutrements of a middle class suburban lifestyles surrounding home ownership. A "rapid growth in the number of mortgage products and loan options is helping buyers to overcome down-payment hurdles ... however, some of these loans come at a price of increased risk to the borrower," cautions one real estate analyst. (Inman, 2005)

When interest rates are low, buyers may be tempted to exceed the costs of what they are likely to be able to afford in the long-term. "Lower-than-expected mortgage interest rates" pushed home sales to a fifth consecutive record in 2005, the National Association of Realtors reported to Real Estate News at the beginning of 2005. But 30-year fixed-rate mortgage rose slowly to only 6.1% in the fourth quarter, and should reach only 6.5% by the end of 2006. This means that mortgage rates are likely to remain fairly tame, and point to the long-term prospect of rates of interest on home mortgages that will be attractive and within the immediate reach of many homebuyers of modest means, despite fears that such a rosy prospect cannot last forever. Favored lender Freddie Mac reported the 30-year fixed rate dropped to 5.62%, a recent, record low for mortgage rates. (Inman, 2005)

The catalyst of change came in 1949, when the U.S. government established the "Housing Act of 1949." At this point it became a national goal to improve living standards for all American families and provide them with the opportunity to own their own home. When the act was established only 55% of American families owned their own homes. Thirty-five percent of them did
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