The Velocity Of Money And Its Impact On Home Loan Rates

Jon D. Nelson
Senior Mortgage Loan Officer
NMLS #2550
Mann Mortgage, LLC

If you’ve been watching the economic news, you’ve probably noticed that market experts and traders have been keeping a close eye on the Commerce Department’s Personal Spending and Personal Income reports. Obviously, those reports provide insight into the health of our economy, but did you know they also influence home loan rates? That’s right, personal spending can actually influence the interest rates that are available when you purchase or refinance a home.

Here’s why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, there is little impact until that money is spent or lent – and passes from one hand to another or one business to another. The speed at which this money passes between parties is the velocity of money.

With the job market slow to rebound, consumers aren’t spending as much and businesses are still reluctant to spend money they don’t absolutely have to. With the present velocity at low levels, inflation remains subdued…and that’s good for home loan rates. Home loan rates are tied to Mortgage Bonds and inflation is the arch enemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, excess money in the system may cause inflation – which is bad for rates. Even the slightest whiff of inflation can cause mortgage rates to rise.

The effects of inflation can significantly affect a consumer when purchasing a home or refinancing. Even a reasonably priced home can become unaffordable when high interest rates are a factor. When interest rates translate into higher mortgage interest rates, the overall price of the home increases and so does the monthly payment. A significant increase in the monthly mortgage payment can be the determining factor in terms of a consumer’s purchasing power or ability to refinance. These conditions can also influence housing prices as the demand for homes increases as well.

While we certainly want to see the economy recover, we have to remember that there’s an inverse relationship between good economic news, and Bonds and home loan rates. Weak economic news can cause money to flow out of Stocks into Bonds, helping Bonds and home loan rates improve. Strong economic news on the other hand, normally has the opposite result.

Home loan rates are at a historically low level, but this clearly won’t last forever. Now is an ideal time to purchase a home or refinance – before the velocity of money and rates change. If you or anyone you know would like to learn how to take advantage of these historically low home loan rates, please contact me at the Downtown Honolulu office. My direct line is 286-7891.

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