Real Estate

Following the Interest Rates- Higher or Lower

If you are thinking about buying a house or refinancing your present home, you probably are wondering if this is the right time. If you think rates will go up, you want to buy now before they do, but if you think they are going to go down, you may want to delay your purchase and take advantage of lower rates.

Understanding how interest rates behave, and what influences them, will help you make an educated guess about the direction they will take. The price of money is interest rates, and if you understand what will affect the price of money, you will understand what affects interest rates, including your home loan rate.

The most important predictor of interest rates is inflation. The inflation rate has two primary indicators. These are the producer price index and the consumer price index.

The Producer Price Index (PPI) measures the changes in the prices producers need to pay to produce items. If PPI is rising, this will mean that the cost of finished goods is more, which mean inflation.

The Consumer Price Index (CPI) measures the change in prices of a given ?market basket? of consumer goods. CPI is more familiar to most people because it shows whether the prices we are paying are rising or falling, and by how much. The so called ?basket of goods? used is consistent so that economists can measure how prices change, but because food and energy are included, they are often eliminated to lower volatility. This leaves what is considered the ?core? inflation rate which is a better indicator of general prices and inflation.

GDP or Gross Domestic Product also is a predictor of inflation and therefore interest rates. Central banks try to foster slow, steady growth in the economy, since zero growth means recession, and too fast growth will lead to inflation. The Fed therefore intervenes and when the economy is growing too quickly, it will raise interest rates to slow it down, or conversely, lower interest rates to stimulate the economy for increased growth.

The next very important interest rate indicator is the unemployment rate. Low unemployment is thought of as inflationary since employers have to chase after too few candidates, and will raise wages to do so. If the economy has high unemployment, interest rates will fall because salaries will fall because employers do not have to offer higher salaries to retain employees. Higher wages lead to price spirals while lower wages give way to to prices falling.

It can be very beneficial to a prospective homebuyer to keep on top of these kinds of economic indicators to know what is happening in the interest rate arena. Normally, a slow economy with elevated unemployment will mean that rates will be falling. Increasing GDP and reduced unemployment means the economy is heating up and you can expect increased interest rates in the future.

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