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

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, 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 money to make 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, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.

Currently, home loan rates are near historically low level, but that situation won’t last forever. That means 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 more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me.

Who says December is a “quiet” month in the real estate industry?

Here are just a couple significant happenings that will have an enormous impact on the Real Estate industry throughout 2010.

1. HUD recently postponed the implementation date of Mortgagee Letter 09-28 from January 1, 2010 to February 15, 2010. According to the letter FHA-approved lenders will be prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan. Although use of an Appraisal Management Company is not mandated when obtaining an FHA appraisal, one has to expect that most lenders will use the same channels already in place for ordering conventional appraisals under the HVCC.
2. NEW Good Faith Estimate 2010. This is the new hurdle lenders and brokers must tackle. The complexities of this new form of disclosing loan terms and fees will no doubt affect the flow of transactions but we want to make it clear that we are fortunate to work with some of the best lending partners in our industry and are implementing systems to ensure a smooth transition to this new format.

Our staff possesses a thorough knowledge of rates, loan products, and lenders programs. We use this information to structure a loan that will give you the mortgage that you deserve.
We look forward to working with all of you in 2010 –