How Long Can You Bank on Low Interest Rates: The Best Guess at the Best Time to Buy

It is often thought that the best time to buy is spring, but from a pricing point of view it is probably more like late summer. Why? In the spring inventory levels are moving up. The large inventory in a weak market drives prices down, but by contrast to the late summer time frame, there are still many people in the spring who are hunting for homes for sale in Indiana.

By August and September many who planned on moving have moved—thus fewer potential purchasers are on the hunt for homes for sale in Indiana. But the advantage for purchasers is that inventory levels are typically still quite high. Fewer buyers, more inventory, and (this year) unusually low interest rates equal an amazing time to purchase a home. This is the ultimate buyer’s market.

Still many may wonder how long the interest rates will remain so low. Nobody knows for sure, but most economists are betting on inflation rather than deflation for 2011. Because of the large amount of stimulus made possible by Chinese loans and the Federal Reserve’s printing presses, rates are bound to go up early next year or by late next year for sure.

A good analogy for what we will be seeing is the proverbial dog running to the end of his leash… he is feeling his oats, but doesn’t know that his time of reckoning is near. When he gets to the end of his rope, he makes a stunning discovering i.e., things in motion tend to stay in motion. His neck gets stretched. Now the application to real estate: the government prints money and borrows money, but if a person is afraid that the recession isn’t over, and additionally that he/she might lose their job, he/she won’t spend. When people decide not to spend, it won’t matter how cheap money is, the economy stalls.

Once people begin to gain confidence, they start to spend money. Since money is cheap and widely available, they will overspend. The government reacts by stopping the printing presses, slows the borrowing from abroad, and increases interest rates. Since monetary policy, unlike fiscal policy (tax policy can have an immediate impact), the impact is not immediate (6 to 9 months lag). So even though M1 (primary measure of the money supply) slows, people don’t stop spending. This can produce dramatic inflation.

When people realize home values are going up faster than their ability to pay, the market hyperventilates and we get hyperinflation. Example: During the late 1970s many couples would work multiple jobs so they could purchase larger, more expensive homes. They believed inflation would eventually make the home they purchased affordable. That worked until Reagan became President and consequently brought tight monetary policy.

Ok, Phil we can see that you used to teach economics, but what does this mean to me? Well, it is better to own property when rates are low and to become an owner prior to an inflationary spiral. Inflation this time will make the late 1970’s look mild. Now is likely the best time to buy.

Homes for sale in Indiana, especially in Hamilton County, will do well when inflation arrives, and it will arrive in the not-too-distant future. That makes this summer/fall a great time to buy, if you can safely do it.

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