Inflation Effects On Housing Prices
A Dictionary.com defines inflation in economics means as: - A substantial, persistent rise in the level of prices related to an increase in the volume of money and resulting in the loss of value of currency.
This is a very involved explanation for the supply and demand principal. These are the most potent indicators of how well or poorly a countries economic system is doing. It has always been that real estate was a better investment than any hedge fund. When supply outstrips demand the situation that economists refer to as inflation exists.
Interest rates directly affect the cash flow in any economy. The higher the interest rates the less likely people are to take out loans. This affects the housing market in a big way. Potential homeowners rely on loans for their purchases. If the interest rates means they will [pay a lot for the use of the money they will not buy.
The fact is that even the lowest priced homes can be rendered unaffordable by high interest rates. The increasing rates means that the mortgage interests are also higher and this means larger monthly mortgage payments. This means that the dollars a potential buyer has buys much less.
The truth is that interest rates affect spending in general. All goods and services that become more expensive as a result of the rising interest means less being bought by consumers. This is as true of houses as well as organic products and television sets.
The cause and effect is as simple as that. The less affordable a thing becomes the more it adds to the overall miasma of the economic picture. Even though the rise in interest rates most surely increases the cost of renting it is still cheaper to rent in most cases than to buy.
It all comes down to keeping a close eye on all of the economic indicators. It is important to know whether the interest rates are increasing or decreasing but it is only one half of the story. This is a carefully balanced program perpetrated by the federal reserve.
Raising the prime lending rate when an economy is growing too fast can slow it down but this too can create the inflation that it was supposed to stop. This is what has happened in the United States. It does take a while for the rates to affect the housing market but it does affect it and the suffering begins. Foreclosures and bankruptcies ensue whenever inflation gets out of hand.
The economy is on the mend but it will likely be a while before the damage is rectified. The housing market is still floundering under the higher interest rates but there is light at the end of this long dark tunnel.
About the Author
Jonathan Steele is a structural engineer and a metal decking research and development specialist at http://www.d-macindustries.com . Jon enjoys playing golf and traveling around the world with his wife and three children.
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