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Gas is cheap – pleasantly affordable even. Americans from coast to coast are saving money. I am saving money. How long will our good fortune last? It depends, how long will crude oil prices stay low?
Low oil prices are offering a hidden gift to consumers that goes beyond the gas pump: They also indirectly support lower mortgage rates.
Despite a fairly significant uptick in rates over the past week or so, rates on the 30 Yr fixed remained very close to historic lows.
Freddie Mac, who has surveyed mortgage lenders since 1973 to bring us the national average, has the 30 year fixed rate mortgage averaging 3.76% as of February 19th, 2015.
So what the heck does the price of oil have to do with my mortgage rates?
What the Heck Oil Prices Have to Do with Mortgage Rates?
From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.
Added to this is the fact that the oil cartel OPEC is determined not to cut production as a way to prop up prices.
The price of crude oil is part of the perfect storm for mortgage rates. There are two factors that are the primary drivers:
Let’s start by first making sure that we are clear. Major consumers of crude oil will be the beneficiaries of the good fortune that is affordable crude oil.
Overall, low oil prices should benefit the U.S. economy as the oil and gas industry only accounts for about 2% of our gross output.
Countries that are primarily producers of crude, but not the biggest consumers, will take the biggest economic hit.
National budgets in many developing countries are based on the expected price of crude oil. When those expectations are not met, neither are revenues.
Revenue issues put pressure on the currency and markets of the oil producing economies which adds risk in the eyes of investors.
That moves risk-averse investors to safer investment vehicles. It moves them, at least right now, to U.S. markets. That’s our first factor.
Effect of Falling Crude Prices on Inflation
Falling crude prices affect more than just our price at the pump. They drive transportation costs down, which trickles down to the cost of goods themselves.
Everything gets more affordable, which generally means that we buy more of it and the economic snowball begins to roll.
A more affordable economy also represses inflation. In general, mortgage interest rates are very sensitive to inflation, so when the risk is mitigated we see positive signals from the rate market.
Less risk means lower reward (yield) for investors and lower interest rates across the board for those borrowing.
So, less inflationary risk is our second factor.
Bottomline – Lower gas price does play a role in keeping mortgage rates low. So, you get to save money both at the gas station and with your home loan.
Economics can be fickle as different market forces pull on one another. That said, the stars have temporarily aligned and we should all take advantage of our good fortunes.
Also Read – How to Become a Better Mortgage Rate Shopper?