What are Interest Rates Doing? Should I Buy a House?

Of all the decisions you have to make correctly when you are deciding on a mortgage, timing the interest rate may be one of the biggest. 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.

Understanding how interest rates behave, and what influences them, will help you decide about the direction they will take. If you look upon interest rates as the price of money, and realize that factors like supply and demand influence all prices, you can see how the ?price? of money can even affect your mortgage.

The most important predictor of interest rates is inflation. There are two major culprits when it comes to inflation. These are the producer price index and the consumer price index.

The Producer Price Index (PPI) measures the changes in producers producers need to pay to produce items. If PPI is rising, this means that the cost of finished goods is higher, which mean inflation.

The Consumer Price Index (CPI) measures the change in prices of a given ?market basket? of consumer goods. It is considered the most important measure of inflation, since increasing prices that consumers pay for goods are the basis of inflation. The so called ?basket of goods? used is consistent so that economists can measure how prices change, but because food and energy are included, they are often eliminated to reduce volatility. The remaining items form the core inflation rate, which will tell us how prices will behave in the future.

GDP or Gross Domestic Product also is a predictor of inflation and therefore interest rates. The Fed (Federal Reserve Bank-the Central Bank of the United States) is responsible for maintaining the economy on an even keel-not too much growth, which will cause inflation and not too little, which will cause a recession. The Fed therefore intervenes and when the economy is growing too fast, it will raise interest rates to slow it down, or conversely, lower interest rates to stimulate the economy for increased growth.

An additional important indicator is the unemployment level. If the economy is experiencing low unemployment, inflation will probably follow since salaries have to go up to bring in candidates. High unemployment usually leads to lower interest rates eventually since employers can keep wages lower since there are so many candidates for each position. In other words, increased wages lead to a wage price spiral and decreased wages bring prices down.

The prospective home buyer can help himself by watching these indicators to try to determine rates. The bigger picture to watch out for is a lower GDP with unemployment which leads to lower rates. Growing GDP and low unemployment can signal a faster growing economy and rates will probably be increasing.