Changing market structure and Fed policy: The case of residential housing

Failure by the Fed to be aware of the concerns of those who are affected by Fed policy can have unforeseen consequences. Because the majority of funds now funneled to home buyers comes through the mortgage securitization processes, mortgage rates are now more sensitive to changes in the present financial markets. As a result, changes in the Treasury market will be quickly reflected in the mortgage-backed securities market. And second, because profit margins of institutions involved in the flow of funds from savings to home buyers are low and sensitive to interest rate changes, an availability effect remains. The Fed, therefore, is likely to find that the housing impact of monetary policy depends on micro estimates of the interest elasticity of housing demand.