Do the Fed Funds rate and M2 money supply really matter to the St Louis real estate market?

For the past several months there have been many reports anticipating the moves of the Federal Reserve regarding interest rates then followed by tons of articles, blog posts and videos analyzing then predicting the impact of the Fed’s decision on the economy.  The other popular topic in this area is the “Money Supply”, usually M2 money supply and whether it’s increasing or decreasing as well as the impact on the economy.

Should St Louis homeowners and potential home buyers really care about the Fed Funds rate or M2 money supply?

First, let’s talk about the Fed Funds rate and what it is, what it is intended to do and the affect it can have on the real estate market.  The Fed Funds rate is the interest rate at which banks lend to each other overnight to maintain their reserve requirements. This rate is set by the Federal Reserve, and changes to the rate can have a ripple effect throughout the economy, including the mortgage and housing markets. When the Fed lowers the Fed Funds rate, it can stimulate economic growth by making it cheaper for banks to borrow money, which can lead to lower mortgage interest rates. Lower mortgage rates make it more affordable for homebuyers to finance their purchases, which can increase demand for homes and drive up prices. Conversely, when the Fed raises the Fed Funds rate, it can lead to higher mortgage interest rates, which can slow down the housing market and lead to lower demand and prices.

Next, the the M2 money supply.  The M2 money supply includes cash, checking accounts, savings accounts, and other liquid assets that can be easily converted into cash. When the M2 money supply increases, it can stimulate economic activity by making more money available for borrowing and spending. This can lead to lower mortgage interest rates as well, as banks have more funds available to lend out. However, if the M2 money supply increases too rapidly, it can lead to inflation, which can cause mortgage interest rates to rise.

So, as you can see, both the Fed Funds rate and M2 money supply can have a significant impact on the cost of a home mortgage as well as home prices so I would say the answer to the question I posed is “yes”.  Granted, we don’t all need to become economists or stay up late at night pouring through spreadsheets and date, but to be aware of factors that affect the economy as a whole and as a result, the real estate market we’re in, would be wise.

How can knowledge of the Fed Funds rate and M2 money supply help me as a home seller or buyer?

The short answer is, it gives you a little insight into perhaps where things are headed which may help you make the decision to buy or sell sooner or later. For example, perhaps  you are contemplating buying an home but anguishing over the fact the mortgage interest rates are double what they were a year or two ago and you’re thinking maybe you should wait until things settle down.  Well, if you see the Fed Funds rate getting increased with talk of more increases while that is no guarantee mortgage interest rates will increase as well, as I explained above, it’s certainly an indicator that is a likelihood.  Therefore, you may decide it’s better to make a move now than later.

What’s an easy way to track this stuff?

I have the answer for you.  The charts below are two of the many charts and other information available on St Louis Real Estate Search as well as from MORE, REALTORS® .  The first chart shows the relationship historically between St Louis home prices and the M2 Money Supply.  Generally, they follow the same trend but, when the trend for one changes, like it did with St Louis home prices (the red line on the chart) beginning in the late 90’s through the housing market bubble burst after 2006, something happens to bring them back in line.  As you can see, starting a little over 3 years ago the pace at which M2 was growing outpaced St Louis home prices, but St Louis home prices quickly caught up. Now it’s the opposite and it looks like both a making a downward correction.

The bottom chart shows the close relationship between the Fed Funds rate and mortgage interest rates.  With little exception, when the Fed Funds rate increases or decreases, mortgage rates follow. For the past year, the Fed Funds rate has increased and the trend is upward so I wouldn’t expect to see falling mortgage interest rates anytime soon.

St Louis Home Prices vs M2 Money Supply

(click on chart for live, interactive chart)

St Louis Home Prices vs M2 Money Supply

Federal Funds Target Rates (Upper and Lower Limits) vs 30 Year Fixed Rate Mortgage Rates

(click on chart for live, interactive chart)

Federal Funds Target Rates (Upper and Lower Limits) vs 30 Year Fixed Rate Mortgage Rates


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