How Does the GDP Affect Interest Rates or the Price of Real Estate?

Economic news:

People often ask me what the economic news has to do with real estate. How does the GDP affect interest rates or the price of real estate?

Or what do I mean that the Consumer Price Index could affect the price of a home in Torrance?

On some economic news not much happens, but other news can foretell of changes coming 1 month to even 2 years ahead. 

Here are the important good news/bad news things to remember:

• If there is good news in the economy, rates could be going up and prices of homes could be going up.

• If there is bad news in the economy then rates could be going down and prices, too.

This week, for example, we received news on Wednesday that during Q1 (first quarter of the year) the economy contracted more than was expected.

This made investors worry that if it was a down quarter, and we have another down quarter, then we could be headed into another recession.

Other investors just chalked it up to really bad weather, and were confident that this was a one-off situation and that things, when reported for June 30th, would prove to be fine in the economy.

Then, however, you turn to the news on Thursday that personal income was up .4% but personal spending was up only .2%. The question then becomes, “Why aren’t people spending?”

This comes down to one piece of economic data: our consumer confidence number that tells us the overall feeling about the economy.

If consumers are worried about their job or other economic factors, they will not spend on big ticket items like cars and homes, which means the economy will not pick up.

So that’s bad news for the price of homes, but good news for rates.

Economists look at about 20 areas of data, then take an educated guess at what it means for various markets. Who they work for as an economist, and what their employer wants them to forecast, will determine how they weigh the various pieces of information.

When I was a kid, my dad would wear a business suit every morning, briefcase in hand and go to work. I remember asking him exactly what he did, and he said, “I am a professional guesser.” He was an economist.

Remember, what is bad news for us as consumers and workers is usually good for rates. For example, the Feds announced last week that they will keep on track with pulling back their program of buying mortgage debt and bonds, which means that rates eventually will go up.

So, if you are a retired person relying on CD income, or savings account income that’s good because you want to earn higher interest rates. But if you are a buyer of a home, you want the lowest rate possible.

Whether the news is good or bad, someone will benefit. That’s the nature of cycles.