How To Understand How Interest Rates Act
When you are trying to time the best entry point to borrow for your house, picking a time when interest rates are down will save you a lot of money. Those who think rates will increase want to buy sooner and take advantage of currently lower rates, and those who think they will decrease want to wait until a more opportune time.
How are these interest rates determined in the first place, and will understanding this help in the decision making process? The first thing to understand is that interest rates are actually the price of money and like all prices, they are determined by supply and demand.
The most important predictor of interest rates is inflation. The inflation rate has two primary indicators. They are the PPI and the CPI, 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. Increases in the Producer Price Index means higher prices for finished goods, and that means inflation.
The Consumer Price Index (CPI) measures the change in prices of a fixed ?market basket? of consumer goods. Most people are more familiar with CPI because it more directly affects what they pay for goods. Certain segments of CPI can ?skew? the results, so analysts frequently remove changes in food and oil prices, which can be too volatile. The remaining items form the core inflation rate, which will tell us how prices will perform in the future.
GDP is another fairly good predictor of inflation and 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. Central banks intervene in the money markets to control the money supply to slow the economy down or speed the economy up.
An additional important indicator is the unemployment rate. Low unemployment tends to lead to inflation, since it leads to higher wages which leads to higher prices. High unemployment usually leads to lower interest rates eventually since employers can keep wages lower since there are so many candidates for each job. Lower wages mean lower prices which means lower inflation.
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 arena. The bigger picture to watch out for is a falling GDP with unemployment which leads to lower rates. Increasing GDP and low unemployment means the economy is heating up and you can expect higher interest rates in the future.
Related Posts:
Tags: Affordable Insurance, home, insurance, Life Insurance, mortgage, mortgage life insurance, real estate
I’ve been reading along for a while now. I just wanted to drop you a comment to say keep up the good work.