Of the many decisions you try to make correctly when you are deciding on a home loan, 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 go down 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 price of money is interest rates, so if you understand what will affect the price of money, you will know better what affects interest rates, which includes your home loan rate.
The most important predictor of interest rates is inflation. There are two major things to watch when it comes to inflation. These are the PPI and the CPI, 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. Consistently rising PPI, which raises prices of finished goods, will render all goods more expensive and lead to inflation.
CPI is the measure of the change in prices at the consumer level, measured as a group of 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 percentages, so analysts frequently remove changes in food and oil prices, which can be too volatile. What remains is considered the ?core? inflation rate which is a superior 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 therefore intervenes and when the economy is growing too quickly, 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 also has an influence on interest rates. Low unemployment is thought of as inflationary since employers have to chase after too few candidates, and will increase wages to do so. If unemployment is high, the resulting decreased wages will mean inflation will be down. Higher wages lead to price spirals and lower wages lead to prices falling.
The prospective home purchaser can help himself by keeping an eye on 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. On the other hand, increasing GDP and decreasing unemployment will signal an increase in interest rates.
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