What are Interest Rates Doing? Should I Buy a House?
If you are considering buying a house or refinancing your present home, you probably are asking yourself if this is the right time. If you think rates will go up, you want to purchase now before they do, but if you think they are going to go down, you may want to put off your purchase and take advantage of lower rates.
A comprehension of how interest rates are determined, and what influences them, will help you make an educated guess 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.
Inflation is one of the very important influences on interest rates. Inflation is measured by two primary indicators called price indicators. The Producer Price Index and the Consumer Price Index are the primary two factors.
PPI is the fluctuation in prices at the stage where goods are produced. Consistently rising PPI, which raises prices of finished goods, will make all goods more expensive and contribute to inflation.
CPI is the measure of the change in prices at the consumer level, measured as a group of goods. This is a very important signal of inflation since this is what we will all pay for our goods. Often, to remove some of the volatility of the CPI, analysts will look at core inflation, which eliminates energy and food prices from the formula. The remaining items form the core inflation rate, which will tell us how prices will perform in the future.
GDP is the next widely used indicator of how inflation and therefore interest rates will behave. The Federal Reserve Bank tries to keep the economy growing at a sustainable rate; too slow and production will lag, which causes recession; too fast and the economy may overheat. Central banks act in the money markets to control the supply of money to slow the economy down or speed the economy up.
The next very important interest rate indicator is the unemployment level. Low unemployment tends to lead to inflation, since it leads to higher wages which will lead to higher prices. If unemployment is high, the resulting lower wages will mean lower inflation. In other words, increased wages lead to a wage price spiral and decreased wages bring prices down.
It can be very beneficial to a prospective homebuyer to keep track of these kinds of economic indicators to understand what is happening in the interest rate market. A general rule is lower GDP and increasing unemployment will lead to lower interest rates. On the other hand, increasing GDP and decreasing unemployment will signal an increase in interest rates.
