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Interest rates

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Raging2020
LIF Infant

Member since 8/21

293 total posts

Name:

Interest rates

How does raising interest rates help inflation?

I’m just trying to wrap my head around how making house hunters payments a couple hundred dollars more a month will help lower gas prices, food prices, increasing wages, and everything else that has gone up???

We are at the point where we would have to put more money into our that we wouldn’t never break even so we were considering moving, well that idea is our the window if rates are going to go as high as they say!! The timing stinks because we outgrew this house….and I need a new kitchen. Ughhh.

Posted 4/25/22 11:30 AM
 
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LSP2005
Bunny kisses are so cute!

Member since 5/05

19406 total posts

Name:
L

Re: Interest rates

So it used to be that interest rates for mortgages were also tied to interest rates for savings accounts, CDs, and bonds. However, a few years ago those rates were uncoupled. So even if you see higher interest rates for mortgages, they will not have they same direct correlation to savings accounts.

With that said, the fed has been printing money like gangbusters, and for the past ten years we have had incredibly inexpensive debt. Historically, mortgage rates have been in the 5-15% range. While I don’t think we will go to 15, I do think we will get to 6-8% in the next two or three years. I do not think we will go back to 3% any time soon, so if you were relying on cheep debt, you should rethink that plan.

The goal of the fed is to slow down the rampant inflation. They have expressly said they will raise rates to try and slow down the price increases. What they hope to accomplish is a gradual decrease in home prices. I would not expect a massive sale price, but I would expect a stagnation and moderate decreases. As interest rates rise, home prices stop surging and sales taper off. What that means is more people will decide to stay put.

Posted 4/25/22 3:26 PM
 

Raging2020
LIF Infant

Member since 8/21

293 total posts

Name:

Re: Interest rates

Posted by LSP2005

So it used to be that interest rates for mortgages were also tied to interest rates for savings accounts, CDs, and bonds. However, a few years ago those rates were uncoupled. So even if you see higher interest rates for mortgages, they will not have they same direct correlation to savings accounts.

With that said, the fed has been printing money like gangbusters, and for the past ten years we have had incredibly inexpensive debt. Historically, mortgage rates have been in the 5-15% range. While I don’t think we will go to 15, I do think we will get to 6-8% in the next two or three years. I do not think we will go back to 3% any time soon, so if you were relying on cheep debt, you should rethink that plan.

The goal of the fed is to slow down the rampant inflation. They have expressly said they will raise rates to try and slow down the price increases. What they hope to accomplish is a gradual decrease in home prices. I would not expect a massive sale price, but I would expect a stagnation and moderate decreases. As interest rates rise, home prices stop surging and sales taper off. What that means is more people will decide to stay put.



I dunno, I’m just not grasping how it’s tied to inflation. I don’t see how people being stuck in their homes or paying what they would have paid for a house two years ago but at a higher rate is going to lower the price of things like gas and food?

Posted 4/25/22 6:18 PM
 

LSP2005
Bunny kisses are so cute!

Member since 5/05

19406 total posts

Name:
L

Re: Interest rates

If a person has a fixed interest mortgage and bought their home a few years ago it won’t. They will stay put in their home.

Posted 4/25/22 10:02 PM
 

lululu
LIF Adult

Member since 7/05

9120 total posts

Name:

Re: Interest rates

Posted by Raging2020

Posted by LSP2005

So it used to be that interest rates for mortgages were also tied to interest rates for savings accounts, CDs, and bonds. However, a few years ago those rates were uncoupled. So even if you see higher interest rates for mortgages, they will not have they same direct correlation to savings accounts.

With that said, the fed has been printing money like gangbusters, and for the past ten years we have had incredibly inexpensive debt. Historically, mortgage rates have been in the 5-15% range. While I don’t think we will go to 15, I do think we will get to 6-8% in the next two or three years. I do not think we will go back to 3% any time soon, so if you were relying on cheep debt, you should rethink that plan.

The goal of the fed is to slow down the rampant inflation. They have expressly said they will raise rates to try and slow down the price increases. What they hope to accomplish is a gradual decrease in home prices. I would not expect a massive sale price, but I would expect a stagnation and moderate decreases. As interest rates rise, home prices stop surging and sales taper off. What that means is more people will decide to stay put.



I dunno, I’m just not grasping how it’s tied to inflation. I don’t see how people being stuck in their homes or paying what they would have paid for a house two years ago but at a higher rate is going to lower the price of things like gas and food?



The fed doesn't raise the rates on mortgages, they raise the Fed funds rate. The banks just pass on this cost to the consumer by raising rates on all types of loans. Raising the fed funds rate should slow inflation because it increases the cost of borrowing money thereby decreasing demand. Once demand decreases the price of goods should go down. But also, when you increase the mortgage rates you cut what a consumer has left to spend so that should decrease demand as well. I don't remember all the ins and outs from economics but it typically does work.

Posted 4/26/22 8:16 AM
 

JennP
LIF Adult

Member since 10/06

3984 total posts

Name:
Jenn

Re: Interest rates

Posted by lululu

Posted by Raging2020

Posted by LSP2005

So it used to be that interest rates for mortgages were also tied to interest rates for savings accounts, CDs, and bonds. However, a few years ago those rates were uncoupled. So even if you see higher interest rates for mortgages, they will not have they same direct correlation to savings accounts.

With that said, the fed has been printing money like gangbusters, and for the past ten years we have had incredibly inexpensive debt. Historically, mortgage rates have been in the 5-15% range. While I don’t think we will go to 15, I do think we will get to 6-8% in the next two or three years. I do not think we will go back to 3% any time soon, so if you were relying on cheep debt, you should rethink that plan.

The goal of the fed is to slow down the rampant inflation. They have expressly said they will raise rates to try and slow down the price increases. What they hope to accomplish is a gradual decrease in home prices. I would not expect a massive sale price, but I would expect a stagnation and moderate decreases. As interest rates rise, home prices stop surging and sales taper off. What that means is more people will decide to stay put.



I dunno, I’m just not grasping how it’s tied to inflation. I don’t see how people being stuck in their homes or paying what they would have paid for a house two years ago but at a higher rate is going to lower the price of things like gas and food?



The fed doesn't raise the rates on mortgages, they raise the Fed funds rate. The banks just pass on this cost to the consumer by raising rates on all types of loans. Raising the fed funds rate should slow inflation because it increases the cost of borrowing money thereby decreasing demand. Once demand decreases the price of goods should go down. But also, when you increase the mortgage rates you cut what a consumer has left to spend so that should decrease demand as well. I don't remember all the ins and outs from economics but it typically does work.



This is generally correct. I will add that high demand for housing also increases demand for other (complementary) goods and services as people renovate and furnish their new homes.

The caveat here is the extent to which corporate greed plays a role. We'll see what they do with prices but I'm skeptical. It depends on the product though. Some products have a greater price elasticity than others but I'm getting into the economics weeds.

Posted 4/26/22 8:42 AM
 

MarathonKnitter
HAPPY

Member since 2/07

17374 total posts

Name:
EMBRACING CHANGE

Re: Interest rates

i don't have an "economics" mind...

so, what you're saying is:
if it gets harder to take on debt (increased rates), then people are less likely to spend willy-nilly (get a heloc to put on an addition they've been dreaming about) and stick to a more basic lifestyle. this will then decrease the demand for the construction, but have a ripple effect on...
* the gas the construction workers use to get to and from the job
* the fast food lunches the construction workers eat
* the wear and tear on the vehicles
etc.

creating, in essence, a lower demand for STUFF... which slows inflation.

so, now, the construction workers do the same as the first guy... live a more basic lifestyle because there is less overtime. and the effects continue all around.

Posted 4/26/22 11:34 AM
 

JennP
LIF Adult

Member since 10/06

3984 total posts

Name:
Jenn

Re: Interest rates

Posted by MarathonKnitter

i don't have an "economics" mind...

so, what you're saying is:
if it gets harder to take on debt (increased rates), then people are less likely to spend willy-nilly (get a heloc to put on an addition they've been dreaming about) and stick to a more basic lifestyle. this will then decrease the demand for the construction, but have a ripple effect on...
* the gas the construction workers use to get to and from the job
* the fast food lunches the construction workers eat
* the wear and tear on the vehicles
etc.

creating, in essence, a lower demand for STUFF... which slows inflation.

so, now, the construction workers do the same as the first guy... live a more basic lifestyle because there is less overtime. and the effects continue all around.



Exactly!

Seems you do have an "economics mind" after all Chat Icon

Posted 4/26/22 1:06 PM
 

MarathonKnitter
HAPPY

Member since 2/07

17374 total posts

Name:
EMBRACING CHANGE

Re: Interest rates

Posted by JennP

Posted by MarathonKnitter

i don't have an "economics" mind...

so, what you're saying is:
if it gets harder to take on debt (increased rates), then people are less likely to spend willy-nilly (get a heloc to put on an addition they've been dreaming about) and stick to a more basic lifestyle. this will then decrease the demand for the construction, but have a ripple effect on...
* the gas the construction workers use to get to and from the job
* the fast food lunches the construction workers eat
* the wear and tear on the vehicles
etc.

creating, in essence, a lower demand for STUFF... which slows inflation.

so, now, the construction workers do the same as the first guy... live a more basic lifestyle because there is less overtime. and the effects continue all around.



Exactly!

Seems you do have an "economics mind" after all Chat Icon



ha!
look at me being all smart, and stuff Chat Icon

Posted 4/26/22 2:01 PM
 

lululu
LIF Adult

Member since 7/05

9120 total posts

Name:

Re: Interest rates

Posted by MarathonKnitter

i don't have an "economics" mind...

so, what you're saying is:
if it gets harder to take on debt (increased rates), then people are less likely to spend willy-nilly (get a heloc to put on an addition they've been dreaming about) and stick to a more basic lifestyle. this will then decrease the demand for the construction, but have a ripple effect on...
* the gas the construction workers use to get to and from the job
* the fast food lunches the construction workers eat
* the wear and tear on the vehicles
etc.

creating, in essence, a lower demand for STUFF... which slows inflation.

so, now, the construction workers do the same as the first guy... live a more basic lifestyle because there is less overtime. and the effects continue all around.



Yes but like I said it has more to do with the Fed increasing the Fed Funds rate and the impact it has on mortgage rates is a biproduct of that, but not the primary incentive for why they raise rates. Fed Funds impacts the overnight rate banks are charged for borrowing funds. It's a lot more complex than the Fed raises rates and mortgage rates go up.

Posted 4/26/22 3:04 PM
 
 

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