Real Estate

What are Interest Rates Up to? Should I Buy a Home?

Of the many decisions you have to make correctly when you are deciding on a mortgage, timing the interest rate may be one of the biggest. If you think interest rates are going up, you will want to lock in a lower rate now, but if you think rates can still fall considerably, you will want to wait before you commit to a mortgage.

Understanding how interest rates are determined, and what influences them, will help you decide about the direction they will take. Interest rates are actually the price of money, and just as the law of supply and demand dictates price, the law of supply and demand will influence the price of your mortgage: its interest rate.

The most important predictor of interest rates is inflation. Inflation is measured by two important indicators called price indicators. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).

PPI is the measure of change in prices in a given length of for goods at the production level. If PPI is rising, this means that the cost of finished goods is higher, which mean inflation.

CPI is the difference in prices at the consumer level and is measured by the overall costs in a mix of goods defined by the government statisticians. Most people are more familiar with CPI since it more directly has an affect on what they pay for goods. The so called ?basket of goods? used is consistent so that economists can measure how prices change, but since food and energy are included, they are often eliminated to reduce volatility. The volatile categories of food and energy can skew the inflation rate, while core inflation will give a better measure if overall prices are on the rise, causing inflation.

GDP is the next widely used indicator of how inflation and in turn interest rates will act. The Federal Reserve Bank attempts to keep the economy growing at a sustainable rate; too slow and production will lag, causing a recession; too fast and the economy will overheat. Central banks intervene in the money markets to influence the money supply to slow the economy down or speed the economy up.

The unemployment rate is another major component of the economy that will affect interest rates. If the economy has low unemployment, inflation will probably follow since salaries have to increase to attract candidates. High unemployment will typically lead to lower interest rates since it means lower wages and therefore lower prices. In other words, higher wages lead to a wage price spiral and lower wages bring prices down.

It can be very beneficial to a prospective homebuyer to keep track of these kinds of economic indicators to know what is happening in the interest rate market. The bigger picture to watch out for is a falling GDP with unemployment which leads to lower rates. On the other hand, increasing GDP and lower unemployment will mean an increase in interest rates.

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