How has monetary and fiscal policies affected the home construction industry?

Question

?

Answer 1

In the past few years, interest rates were kept relatively low for too long a period resulting in low mortgage rates.  Low mortgage rates, plus low credit standards from loan originators, resulting in an increase demand for housing.  Increased demand for housing resulted in increasing home prices and increasing building.  Increased building led to higher land costs.  Builders borrowed more money to develop, purchased more land (through options) and built more houses.  When subprime mortgages collapsed, this resulted in home prices decreasing  and home builders getting into fiscal trouble as they have too much inventory to sell.  Thus, they have had to lower their prices in order to move their inventory of houses, so that they could pay down their debt and so far, avoid bankruptcy.

Fiscal policies include tax deductions for mortgage interest paid by homeowners and tax free capital gains up to $500,000 (for a couple).  Tax deductions for mortgage interest lead to overbuilding as people can afford larger, more expensive houses since part of the interest cost is in essence subsidized by the government (through the interest deduction).  People can also better afford to buy more than one house since the interest deduction is not limited to ownership of one house.

Fiscal and monetary policies have resulted in an increased consumption in housing instead of other, more beneficial areas.