Velocity of Money & the Impact on Home Loat Rates : Lake Lure Blog
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Jodi Neal - Sylvan Properties
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Velocity of Money & the Impact on Home Loat Rates

by Jo Neal on 08/20/10

Mortgage News
What is the Velocity of Money and How Does it Impact Home Loan Rates?

According to the most recent Commerce Department report, Personal Spending and Personal Incomes were unimproved from the previous month, and the Savings Rate increased as consumers cut back on spending. While that data sheds light on the slow economic recovery, it also has implications on home loan rates.

Here's why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens 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 called the velocity of money.

With the job market still very sluggish, consumers aren't spending much money these days...and businesses are still reluctant to spend moneymaking investments in their business. With the present velocity at low levels, inflation remains subdued and that's good for home loan rates. That's because rates are tied to Mortgage Bonds and inflation is the archenemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.

While we certainly want to see better economic recovery news in the near future, we have to remember that there's an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result. Currently, home loan rates are at a historically low level, which makes now 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 more about the current economic situation and how to take advantage of historically low home loan rates, please don't hesitate to call or email right away.

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