What are Interest Rates Up to? Should I Purchase a Home?
If you are considering buying a home or refinancing your present one, you probably are wondering if this is the right time. If you think interest rates are going up, you will want to lock in a lower rate now, but if you think rates may still fall considerably, you will want to wait before you commit to a mortgage.
What determines interest rates depends on many factors, so knowing what they are as well as how they operate can help you make your decision. The price of money is interest rates, so if you understand what will affect the price of money, you will understand what affects interest rates, which includes your mortgage rate.
The first factor to examine in terms of interest rates is the inflation rate. The inflation rate has two primary indicators. They are the PPI and the CPI, the producer price index and the consumer price index.
PPI or Producer Price Index is a measure of the change in prices at the level of production. If the prices of raw products increase, you can be sure prices in general will go up.
CPI is the benchmark 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. Certain segments of CPI can ?skew? the results, so analysts frequently remove changes in food and oil prices, which can be too volatile. This permits them to look at the core inflation rate to understand better where overall prices, and therefore inflation, are heading.
GDP is another relatively good predictor of inflation as well as interest rates. The Federal Reserve Bank attempts to keep the economy growing at a ideal rate; too slow and production will lag, causing a recession; too fast and the economy will overheat. The Fed has some tools to influence interest rates and will use them to increase rates when it needs to slow the economy down and decrease them when it needs to help the economy to pick up.
Another important indicator is the unemployment rate. Low unemployment tends to lead to inflation, since it will lead to higher wages which will lead to higher prices. High unemployment usually leads to lower interest rates over time since employers can keep wages lower since there are so many candidates for each job. In other words, higher wages lead to a wage price spiral and decreased wages bring prices down.
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. In general, a slow economy, with high unemployment, means that interest rates will be coming down, and you should hold off on your loan for a while. Higher GDP with low to no unemployment signals a road to higher interest rates.
