What are Interest Rates Doing? Should I Buy a House?
by Carlota R. Schneider
One of the most critical decisions to make when you are buying a home is to time the interest rates just right. 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.
What determines interest rates depends on a lot of 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, including your home loan rate.
The most important precursor of interest rates is inflation. The inflation rate has two major indicators. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).
The Producer Price Index (PPI) measures the changes in the prices producers have to pay to produce goods. Consistently rising PPI, raising prices of finished goods, will make all goods more expensive and lead to inflation.
CPI is the change in prices at the consumer level and is calculated by the overall costs in a basket of goods defined by the government statisticians edmonton mortgage rate. This is a very important signal of inflation since this is what we will all pay for our purchases. The basket of goods used is indicative of the kinds of goods consumers usually buy, and because it includes food and energy prices, which can move up and down too much, they are frequently taken out of the equation. What remains is considered the “core” inflation rate which is a better indicator of overall prices and inflation.
GDP is another relatively good predictor of inflation as well as 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 has the power to intervene in the economy in a number of ways so that it can decrease rates to slow the economy down and increase rates to speed it up.
The unemployment rate is another major part of the economy that will affect interest rates edmonton mortgage rates. Low unemployment will typically lead to inflation, since it will lead to higher wages which leads to higher prices. If unemployment is up, the resulting decreased wages will mean inflation will be down. This is called the wage price spiral; increased wages lead to higher prices, lower wages to lower prices.
Keeping track of these interest rate indicators will assist you to choose when it is a good time to enter the home loan market. A general rule is lower GDP and higher unemployment will lead to decreased interest rates. Increasing GDP and low unemployment means the economy is picking up and you can expect higher interest rates in the future.
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