In order to clearly understand the price fluctuations, a thorough analysis of interest rates, income changes and consumer behaviors in the market is important. Interest rate is the price paid by an investor for the amount borrowed. It’s therefore the cost incurred by an investor for using external finances to expand his or her operations. Income on the other hand is a measure of revenue that accrues to an individual or nation from the normal utilization of land and capital. Income also determines the purchasing power within a certain market. Consumer confidence is a market behavior which influences the buying decisions within a market. This paper seeks to analyze the impacts of interest rates, income and consumer confidence on the product sales and operating costs within the timber and housing industries.
This is basically the cost of money which an individual or corporate pays for spending another’s money. For instance, a bank or any financial institution will pay a certain proportion on the amount deposited in the bank. This proportion is the interest or cost paid by the bank for investing the depositor’s money. The borrower is therefore obligated to pay back the amount borrowed, also referred to as the principal amount plus an additional amount which a lender charges while lending the amount. Interest rate is usually expressed as a percentage of the principal amount. In most cases, interest rate is centrally regulated by the monetary policy committee of the respective nations. The rates however differ depending on the type of borrowing or saving that one undertakes.
The common types of borrowings and savings that attracts interest rates includes bank loans, mortgages, debenture, credit cards and bank deposits (Tyson, 2006, p.34). With reference to the product sales, customers will tend to reduce their spending when the rates are high mainly because an increased rate discourages borrowing and encourages savings. However, since people mainly borrow to spend, such an increase negatively affects product sales. Timber industries will therefore experience reduced product sales when the interest rates are significantly high. But when the rate significantly reduces consumers will be encouraged to borrow, thus increasing their consumption levels. Interest rate increases the operational costs of a firm or industry since they will be forced to spend higher amounts to repay the borrowed amount. Both the timber and the housing industry will be negatively affected by an interest rate increase as it increases the operational costs and lowers the profitability level.
However, the low mortgage rate that is currently prevailing in the market encourages people to purchase houses. This is more so considering the fact that home prizes have greatly reduced after the great depression that hit the world economy. Investors and individuals can therefore enjoy reduced home prices and mortgage rates. The product sales in the housing industry should therefore be encouraged when the interest rates and the home prices are low.
Interest rates expectations can also greatly affect the product sales since it impacts on the consumer’s purchasing decisions. Incase consumers expects an increased interest rates in the near future, their current consumption will increase thus raising the product sales. But if they expect a reduction of the rates, then their current consumption level will fall in order to wait for the right time. Interest rates reduction expectation will therefore lead to a reduced product sale in the current period.
It determines how much the consumer can willingly spend on purchasing some products or properties. For instance if the level of income increases among individuals and firms more consumptions will be expected in both the timber and housing industry. The reason why an increase in income results to an increase in product sales is because more income will secure more borrowings and thus higher spending. But if the income level of the consumers decrease, the product sales will eventually reduce as they try to cut down their expenditure. Income is therefore positively related to the consumption. When the income level increases, more will be spend on buying timber related products and therefore the product sales will increase. Conversely, when the income level goes down, the effect will be translated by lowering the consumer spending in the industry (Moschandreas, 2000, p.115).
For the housing industry similar effect will be experienced due to change of the income level. The financial institutions will encourage people with high income levels to obtain mortgage and other financial assistance which enable them buy their own homes. The banks will feel more secure when they advance loans to a firm or an individual who has a constant regular income through out the year. This is because they will be assured of the repayments. A country with a stable and consistent growth in income will boost up the housing industry as people will afford purchasing them. But a reduction of the income level by increased taxations and other statutory deductions discourages spending. This is because people will be left with very little disposable income which they can use to secure mortgage or save to later purchase their own houses.
This is the attitude that is mainly developed by the consumers after building trust in a given industry. The attitude encourages people to invest and relate with the venture without any fear of loss on the invested amount. An increased consumer confidence always translates to increased product sales. Additionally, an increased confidence level can encourage more individuals and firms to invest in the housing industry (Baumohl, 2008, p.92). But there has been a significant reduction in confidence in the housing sector due to the economic depression that hit the world’s economy causing a significant loss in the industry. Although the house prices are still very low, no one is willing to invest his or her money in the industry for fear of further loss on the investment. The operational cost in the industry has therefore continued to reduce as people continues to withdraw their investment amounts. Consumer confidence therefore contributes significantly to the purchases decisions of many consumers in the market.
Interest rates, income and consumer confidence are among the major economic indicators which determined the product sales and operational costs within an industry. A slight increase or decrease of such components will eventually translate to an increase in product sales and operational costs. Industries will therefore suffer immense loss when the income and confidence levels tend to reduce among the consumers. A positive impact will however be observed in the industries if the consumer income and confidence level increases. Conversely, an interest rate reduction will translate to increased product sales as more individuals and firms will access loans in order to support their expenditures. But an increase on interest rates will discourage borrowing and thus limit the consumer spending.
Baumohl, W. (2008). The secrets of economic indicators: hidden clues to future economic trends and investment opportunities. New York, Wharton School Publishing. Web.
Moschandreas, M. (2000). Business economics. London, Cengage Learning EMEA. Web.
Tyson, E. (2006). Personal Finance for Dummies. Indiana, Publisher for Dummies. Web.