Discount Rates:

The main business of commercial banks is to lend money to consumers, whether it is to finance the purchase of 1031 Tax Exchange replacement property or not. One of the ways that commercial banks obtain the resources to lend out to its consumers is by borrowing the funds from the Federal Reserve. Commercial banks borrow funds from the Federal Reserve and then lend them out to consumers at a higher rate.

When commercial banks borrow funds from the Federal Reserve, the Federal Reserve charges them interest called a discount rate. This can be interpreted as the cost of borrowed funds by the commercial bank. Each individual commercial bank thus has a prime interest rate that it must use as a benchmark when lending out their borrowed funds to their consumers. If the loan that you obtain to finance your 1031 Exchange Replacement Property is from a commercial bank that borrows from the Federal Reserve then your loan is likely to bear interest at the prime rate plus a spread. Thus, the Federal Reserve can manipulate the discount rate, and its consequences can be felt throughout the real estate market.

When the Federal Reserve raises their discount rate, the interest rates that commercial banks charge their consumers also raises. This means that when the Federal Reserve raises the discount rate, loans obtained to finance 1031 Tax Exchange replacement property will be maid at higher interest rates. As you can imagine, this has a slowing effect on the real estate market. The more expensive it is to finance a transaction, the less transactions are made in the economy. This also can have an effect on property values.

In contrast, when the Federal Reserve lowers their discount rate, the interest rates that commercial banks charge their consumers also lower. This means that when the Federal Reserve lowers the discount rate, loans obtained to finance 1031 Tax Exchange replacement property will be maid at lower interest rates. As you can imagine, this can increase activity in the real estate market. The less expensive that it is to finance a transaction, the more transactions are made in the economy. This can have an increasing effect on property values.