Phoenix Urban Living News. Real Estate In Phoenix Arizona

Following the Interest Rates- Up or Lower

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 increase, you want to purchase now before they do, but if you think they are going to decrease, you may want to put off your purchase and take advantage of lower rates.

How are these interest rates fixed in the first place, and will understanding that help in the decision making process? Interest rates are actually the price of money, and just as the law of supply and demand dictates price, the law of supply and demand will influence the price of your mortgage: its interest rate.

The most important predictor of interest rates is inflation. The inflation rate has two primary indicators. These are the producer price index and the consumer price index.

The Producer Price Index (PPI) measures the changes in producers producers have to pay to produce goods. Consistently rising PPI, which raises prices of finished goods, will make all goods more expensive and contribute to inflation.

CPI is the benchmark of the change in prices at the consumer stage, measured as a group of goods. CPI is more familiar to most people because it indicates whether the prices we are paying are rising or going down, and by how much. The basket of goods used is indicative of the types 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. The volatile segments of food and energy can affect the inflation rate, while core inflation will give a better measure if overall prices are increasing, causing inflation.

Gross Domestic Product is another inflation, and therefore interest rate, indicator. The Federal Reserve Bank attempts to keep the economy growing at a ideal rate; too slow and production will lag, which causes recession; too fast and the economy will overheat. Central banks intervene in the money markets to control the supply of money to slow the economy down or speed the economy up.

The next most important interest rate indicator is the unemployment rate. If unemployment is low, the resulting increased wages will be an inflationary influence. If unemployment is high, the resulting lower wages will mean inflation will be down. Lower wages mean lower prices which equals lower inflation.

If you are considering a mortgage, it is to your advantage to watch these indicators to find the best timing to enter the loan market. The bigger picture to watch out for is a falling 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.