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

When you are trying to time the best time to borrow for your house, picking a time when interest rates are lower will save you a lot of money. Will interest rates go up, in which case you should lock in a fixed rate home loan for as long as you can, or are they headed down, which means you want to either wait to buy or refinance, or choose a rate that adjusts frequently?

How are these interest rates determined in the first place, and will understanding this help in the decision making process? 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 have an effect on your mortgage.

The most important predictor of interest rates is inflation. There are two major culprits when it comes to inflation. The Producer Price Index and the Consumer Price Index are the primary two factors.

PPI or Producer Price Index is a measure of the change in prices at the level of production. Increases in the Producer Price Index means higher prices for finished goods, and that means inflation.

CPI is the measure of the change in prices at the consumer level, measured as a group of items. Most people are more familiar with CPI since 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 no growth means recession, and too fast growth will lead to inflation. The Fed therefore intervenes and when the economy is growing too fast, it will raise interest rates to slow the economy down, or conversely, lower interest rates to stimulate the economy for more growth.

The unemployment rate is another major component of the economy that affects interest rates. If the economy has low unemployment, inflation will probably follow since salaries have to go up to attract candidates. If unemployment is high, the resulting lower wages will mean inflation will be down. In other words, higher wages lead to a wage price spiral and decreased wages bring prices down.

The prospective home buyer can help himself by keeping an eye on these indicators to attempt to determine rates. Normally, a slow economy with elevated unemployment will mean that rates will be falling. Higher GDP with little to no unemployment signals a road to higher interest rates.