The impact of inflation and home loan interest rates—

The impact of inflation and home loan interest rates—

INFLATION IS WHEN YOU PAY $15 FOR THE $10 HAIRCUT YOU USED TO GET FOR $5 WHEN YOU HAD HAIR.” – Sam Ewing. And regardless of how much hair you have these days… one thing we can watch to help a get sense of where rates are going is inflation.

Right now, the headline numbers in the US show little inflation overall… but we are already seeing significant inflation in particular items like commodities, food, and oil – which are being driven by a weak US Dollar, and increasing demand from emerging countries like China and India. In addition, the global market reacted late last week to higher-than-expected inflation in China. This is important to us because Bonds and home loan rates hate inflation, no matter where the whiff of it comes from.

Here’s why. Think of inflation as a hot air balloon and rates as the basket under that balloon. As the balloon (or inflation) rises, the basket (or rates) must rise as well.

So, if inflation moves higher in China, their government has to raise rates to fight inflation. And if rates move higher in China, global investors seeking the highest yield will move away from the relatively meager returns seen in US Bonds – and move their Bond buying money into juicier yields found abroad.

There are so many opinions by so many smart people on both sides of the inflation argument, but right now it is all about what the Bond market thinks. And the recent market action shows just how quickly sentiment in the market can change. Remember, it was just a few weeks ago that fears and whispers of deflation helped the Bond market – and home loan rates – improve.

But now with the Fed intent on avoiding deflation and in fact creating inflation through another round of Quantitative Easing (or QE2), the entire Bond market – including Mortgage Bonds – have began to react negatively. Remember, Quantitative Easing is the concept of the Fed becoming a buyer of Treasuries and Bonds, in a bid to stimulate the economy by:

Creating inflation

Lowering the unemployment rate

Raising Stock prices

While those goals may be good for the overall economy, we need to remember that all three are very unfriendly to Mortgage Bonds and home loan rates.

The good news is, despite ending the week worse than where they started, home loan rates are still near historic lows for the time being.

If you or someone you know is looking to take advantage of low rates, now is the time. Please call or email me today to get started.

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