Interst Rate Effect on Housing Term Paper

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These high costs will lead to a considerable decrease in the amount of investments in the housing market and will decrease the demand for real estate.

3. Elasticity of interest rates

The elasticity denotes whether or not the interest rate curve can be moved from a point to another and adjusted to the market requests based on the demand and supply for housing loans. The elasticity of the interest rate has been widely discussed by specialized economists, their opinions on the subject varying. In 1998, economists Robert Bliss and David Smith concluded that "the elasticity of interest rate volatility, the coefficient linking interest rate volatility to interest rate levels, is 1.5.." Furthermore, in regard with the highly elastic interest rates and low elastic interest rates, the two economists stated that "a moderately elastic interest rate process can capture the dependence of volatility on the level of interest rates, while highly elastic models cannot.

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4. Reasons that affect interest rate

The size of the interest rates is directly influenced by the demand and supply of credits granted in the real estate field. Indirectly, the level of the interest rate is influenced by the total amount of investments in the immobile domain, the current economy of the country and the implemented financial policies or the average net incomes of the credit solicitors. Recently, banking institutions have begun to personalize the loaning process based on individuals' characteristics such as their ability or previous experiences with efficiently using and paying back the loan......

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