Yesterday I wrote a blog titled "What Is More Valuable The House Or The Interest Rate?" to not only raise questions on the value of a property, but it also introduced the affects of Interest Rates on the value of the property. This blog "The Velocity Of Money On Interest Rates, What Is It?" goes into what drives the Interest Rates, and therefore the impact on property values. I wrote about "The Velocity Of Money" last year, and I think that this topic brings the concept of yesterday's "What Is More Valuable The House Or The Interest Rate?" even more to light.
Most of us have all heard the terms Personal Spending and Personal Income, and even though we might not completely understand what they mean, we do know that Personal Spending and Personal Income impact our lives and economy. What most people do not realize is that Personal Spending and Personal Income also influence home mortgage Interest Rates. Personal Spending and Personal Income play a role in the Interest Rates that will be available at the time a home is purchased or refinanced.
The reason that Personal Spending and Personal Income impacts Interest Rates is because of a financial concept called "The Velocity Of Money". Anyone who listens to the news, knows that the government has put a lot of money into the economy in recent years. But even though the government has put all this money into the economy, it does not have any effect until the money is actually spent, or in the case of mortgages, lent to a Borrower. The time that it takes for the money to go from the consumer or borrower, to a business or Lender, is called the "The Velocity Of Money".
The ability to have money to spend depends on the Employment Rate. If people are working they have money to spend, it they are not working then they are very hesitant to spend. The same is true for businesses, if consumers are not spending money, then businesses are not making the money they need to invest and improve their business. When this happens "The Velocity Of Money" slows down, which results in low inflation, which in turn results in low Interest Rates.
Many people are not aware of this, because most are under the impression that Interest Rates are tied into the Fed Rate, when in fact they are tied to the Bond Market, which is impacted by inflation. The lower the inflation, the better Bonds perform, and that creates low interest rates. The opposite happens when "The Velocity Of Money" increases. The additional spending creates inflation, which has a negative effect on the Bond Market, and as a result an increase in Interest Rates.
To put this in simpler terms, a slow or bad economy means low Interest Rates, and a good economy means higher Interest Rates. For those that read my blog yesterday "What Is More Valuable The House Or The Interest Rate?" and followed the scenario that I gave, low Interest Rates increase purchasing power, which in turn should enable homebuyers to purchase high price homes, and therefore increase "The Velocity Of Money"
The economy will not stay in its present condition forever, and sooner or later it will begin to improve, and bring about higher interest rates. This means that now is a perfect time for those that can purchase a home, or need to refinance to do so. It would be a shame if those who have the money to purchase a new home today, missed out on the opportunity to take advantage of the impact that The Velocity Of Money On Interest Rates is having on Interest Rates today by waiting too long. Now is the perfect time to purchase and maximize the purchasing power that has been produced by The Velocity Of Money Has Had On Interest Rates
Original Blog .... Velocity Of Money & Interest Rates, June 17, 2011
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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