The rise in interest rates will have a substantial impact on the affordability and price of homes in the future. With Mr. Bernanke's Quantitative Easing, the pass through of security purchases goes directly into mortgage rates by using Agency Securities. The ability of the Fed purchases to effect the housing recovery will be diminished psychologically over an extended period. However, the Fed can raise interest rates on the back end to influence investor activity. As areas such as Washington, DC metro heat up, investment activity in construction improves, affecting the jobs picture positively. The subsequent rise in house prices following a bust are much more sensitive to rising rates, as the minimum level of interest is met to spur investment activity and business decisions. At this point, any change in rates may sway decisions, if investors are concerned with a fixed level of return associated with the corresponding interest rate. However, over time, more consumption breeds more consumption, and the money multiplier spurs investment activity. The psychological effect of borrowed money through low rates improves over an extended period of years. The housing starts create construction jobs, the home purchases create retail and service jobs. The psychological effect of housing has a significant lag, like the multiplicative effect of money borrowed. House prices do not increase until demand exceeds supply. Builders and investors need a clear sign that the recovery is real before considering new investment. Thus, by the time higher level activity improves, the effect of the interest rates have already passed through to the micro-economy. The psychological impact on housing is a large contributor to GDP in the form of jobs and consumer activity. These jobs areas are significant contributor of income to many non-college graduates. The commercial and urban-suburban development phase has even longer lag, as the population migration and new income is needed to support increased commercial services - like food, retail, grocery and banking. The divergence between cities like D.C. has a significant impact on inequality. The urban development phase goes at a much higher and robust rate, spurring more jobs and services. Areas with declining population often receive minimal commercial development (if any at all). Therefore the gap in geographic and income inequality increase with population migration.
