Understanding Money Velocity
You might have noticed in the news that finance professionals have been keeping tabs on the Commerce Department’s Personal Spending and Personal Income reports. These reports are useful because they provide insight into the current state of economic affairs. Specifically, they are a great way to keep track of current home-loan rates. That’s because personal spending has the potential to impact available interest rates when you purchase or refinance a home.
This is because of a finance concept known as the velocity of money. Every year, billions of dollars get pumped into our economy for use by the American people. But nothing happens with this money until it is either lent or spent. Until the money changes hands from the government to the next person, it remains dormant. Dormant money doesn’t grow in and of itself, nor does it depreciate.
Thus, we measure the speed it takes for cash to move between two parties as the velocity of money.
"Every year, billions of dollars get pumped into our economy for use by the American people. But nothing happens with this money until it is either lent or spent."
With the recent impact of COVID, people around the world are coping with a new way of life. Uncertainty in the future means we’re seeing less spending from consumers and less investment from businesses. This in turn has put us in a state of relatively low money velocity, coupled with low inflation rates. The silver-lining here is that mortgage rates have been at an all-time low.
However, this state of lower money velocity won’t last forever. When spending picks up again, we will see inflation rates rise with it. Then, even the slightest amount of inflation will cause mortgage and bond rates to rise with it.
Nobody wants a bad economy, but it’s important to remember that there’s an inverse relationship between good economic news and Bonds and home loan rates. When the economy is down, people move their money 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.
What’s this all mean for you?
If you’ve been in the market for a home or have an interest in investing in real-estate, right now is the best time in recent history to do it. However, time is literally running out. The longer you put off investing, the less likely you are to be able to capitalize on the current lending situation.
If you or anyone you know would like to learn more about capitalizing on this, then please reach out via the form below. A member of our staff will contact you within a few business days and set up a time for a lender to review your file and show you the best options available for your situation.