Housing Figures the Latest Data to Put Perspectives on Interest Rates

It was reported this week that housing prices in the U.S. declined by 18.6% for the year ending February 28, 2009.

Let’s take another example. Over the same time period, the price of oil fell by more than half.

Think about it — those are two pretty dramatic examples of deflation. They are dramatic both in magnitude — the sheer size of the drops — and in how unusual these declines are. What’s more, these are price declines that really have an impact on the average person’s budget. After all, how many things cost you more month-to-month than housing and energy?

Numbers like these really put interest rates into perspective. Normally, savers need a solid return on their money just to keep up with the rising costs of housing, energy, and other expenses. When those costs are actually falling, any positive return is icing on the cake. Or, literally and figuratively, money in the bank.

So, with prices falling, the 2.5% to 2.75% you can earn on a certificate of deposit is pure profit. So is the 2.25% to 2.5% you could get on a money market account, or similar rates available in savings accounts.

The point is the need to re-think these rates in the deflationary context. When housing and oil prices were going up by 10% or more each year, even earning interest rates of 5% 0r 6% could feel like fighting a losing battle. Now, with key prices falling sharply, even more modest interest rates are a win for consumers.