Real estate touches every life, every day. No resource is more pervasive in our society. Real estate is where we live. It is where we work. Real estate is how we live. It is the countryís most important tangible capital asset. It is a major contributor to the American economy. Annually, real estate capital accounts for about 20 percent of the nationís total gross domestic product.

The aggregate value of the nationís real estate stock-- land, buildings and other fixed improvements-- is over $20 trillion, or almost three times the value of the annual gross domestic product (GDP) of the American economy. The 2.3 billion-acre land mass in the United States is occupied by 267 million people, resulting in a relatively low overall population density of one person per 8.5 acres. Only 3 percent, or approximately 59 million acres of the total U.S. area, is in urban use. More than half of all corporate earnings are generated by real estate and real estate-related activities. The real estate industry uses huge sums of money to conduct its business. In 1996, approximately $1.8 trillion was required to finance real estate market transactions.

WHY DO MORTGAGE RATES

RESPOND TO ECONOMIC EVENTS

When a person borrows money from a lender, the person must sign a promissory note promising to repay the home loan and a mortgage note (or deed of trust) to serve as collateral for the loan. The bearer of these notes has a legal claim to the property until the mortgage loan is either paid in full or refinanced. When a lender has loaned out all of its available funds, the lender will often raise money by selling groups of these notes (mortgage loans) to investors. The selling of mortgage loans to investors is referred to as the "secondary mortgage market." In order to attract investors, this secondary mortgage market must be competitive with similar investment markets. Since a mortgage loan is a long tern debt, the Treasury bond market (debt issued by the federal government) is used as a benchmark for determining appropriate value.

Inflation is the primary factor that affects the Treasury bond markets and interest rate levels.Treasury bond investors do not like inflation because it eats away at the value of their fixed return investments. When the economy slows down, the threat of inflation is subdued and investors become more market rallies (bond prices move higher) on weak economic news. When the price of a Treasury bond moves higher an investor is forced to pay more for this investment, so its yield (return on investment) to the investor declines. When the yield on Treasury bonds decline the yield on all similar investments (including mortgage loans sold in the secondary market) decline as well. If a lender can sell mortgage loans at a lower interest rate to investors, the lender is likely to pass on these lower rates to you, the borrwer.

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Last modified: December 27, 1998

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