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Velocity Of Money & Interest Rates

 

Interest rates are low and will probably continue to stay low as long as the economy is not good. Here is a great explanation from George Souto about the Velocity of Money and how it affects interest rates.

Low interest rates are a double edged sword to say the least. If you can buy it is a great time to do so, but many just cannot. And as long as many cannot, the interest rates will probably remain low.

 

If you watch the news on a daily bases, one of the things that is often reported is Personal Spending and Personal Income.  These reports are supposed to provide a better insight into the health of our economy.  But what most people do not realize is that Personal Spending and Personal Income also influence home mortgage 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 for this is because of what is referred to as the "Velocity Of Money".  The government has put a lot of money into the economy, especially in recent years.  But even though the government has put this money into the economy, it does not have any effect until it is actually spent, or in the case of mortgages, lent to a Borrower.  The time that it takes for this money to be spent or lent, meaning the time it takes to go from the consumer to a business, is called the "Velocity Of Money".

Because many people have been losing there jobs, and having a hard time finding new ones, they are very hesitant to spend money.  The same goes for businesses.  If consumers are not spending money, then businesses are not making the money they need to invest and improve their business. This causes the present "Velocity Of Money" to be slow, which results in low inflation, which in turn results in low interest rates.  

Many people are under the impression that interest rates are tied in to the Fed Rate, when in fact they are tied to the Bond Market.   So 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.

So to put this in simpler terms, a slow or bad economy means low interest rates, and a good economy means higher interest rates.  While we would all like to get people back to work again, and see the economy improve, especially with more home sales, we can make the best of the present situation by taking advantage of the historically low interest rates that are available today. 

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 this great opportunity by waiting too long, and not taking advantage of the low home prices and interest rates that are available today.

Andrea Swiedler, Realtor, Southern Litchfield County Real Estate

2017 President, Greater New Milford Board of Realtors

2017 Connecticut Magazine 5 Star Realtor

 

 Search homes for sale in Litchfield County, CT.

 

Coldwell Banker Residential Brokerage

Litchfield County Regional Office,375 Danbury Rd, New Milford, CT 06776

 

© Andrea Swiedler 2009 - 2017

 Always do right. This will gratify some people and astonish the rest. - Mark Twain

Comment balloon 4 commentsAndrea Swiedler • June 19 2011 07:01PM

Comments

There is no such thing as an interest rate too low. 

The lower the interest rate gets, the closer to CASH it become for the consumer.

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) almost 7 years ago

Andrea, double edge sword is a good way to put it.  We all  want to see low rates, but in my opinion we will not seea turn around toe the housing market until they start to go back up, and people begin to rush to buy before they go higher.

Thank you for the Re-blog.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 7 years ago

Andrea, George's comment makes a lot of sense...we saw much the same thing when the first time buyer tax credit was about to expire...

Posted by Nick T Pappas, Madison & Huntsville Alabama Real Estate Resource (Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, @HomesBirmingham & Providence Property Mgmnt, LLC Huntsville AL) almost 7 years ago

My personal income dropped to zero from November 2010 to April 2011 because I was unemployed. Fortunately, I had a savings account that could cover my expenses for six months, but I'm now in the process of increasing my savings account not only back to six months, but up to 12 months. I don't want to go through again what I went through during those six months.

Posted by EC, JF, Double R and Zoey the Cool Cat (Russel Ray Photos) almost 7 years ago

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