Oil’s influence on mortgage rates




We all know that the Fed (Federal Reserve) has some influence on interest rates, and that they raised the rate by 25 basis points (0.25%) in December 2015. Normally, the increase in the short-term rate will have, in time, an effect on longer-term rates. By the way, the rate increase was presumably related to the purported strengthening of the economy. While I would contend that some aspects of the economy appear to be stronger, most do not. For example, unemployment data are misleading due to the shift in many workers to part-time jobs, and a shift to lower-paying jobs.

Fixed rate mortgage rates have decreased slightly from 3.8% at the end of 2015 to 3.7% in March 2016 (according to an article by First Tuesday). The argument is that investors are leaving the oil market and investing in the relative safety of 10-year Treasuries (bonds). More bond demand results in lower interest rates (higher bond prices): the 10-year rate ended 2015 at 2.27% and closed 1.83% on March 1, 2016.

The following chart indicates the spread between the 30-year mortgage rate and the 10-year Treasury rate has ranged between 1.25% and about 2% since 2010.

mortgage v Treasury rate chart

There is an expectation, then, for mortgage rates to remain low while oil prices remain low. Lower mortgage rates have a positive impact on housing prices.

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