When Gas Prices Are Rising, Mortgage Rates Aren’t Usually Far Behind

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Summer months bring with them a few constants -- catchy songs, Will Smith movies, and rising gas prices.

With oil prices racing higher, it won't be long before gas prices do the same.  And more than any other force, rising gas prices can foreshadow higher mortgage rates.  The relationship is not direct but it's worth examining.

First, the catalyst.  Oil prices rise.  This happens for one of 3 reasons:

1. Growing economies are expected to consume more oil (i.e. more demand for oil)
2. The world's oil exporters reduce drilling capacity (i.e. less supply of oil)
3. The U.S. dollar loses value and oil is bought/paid for using U.S. dollars

Then, as oil prices rise, higher energy costs spill over into everyday business and consumer life, creating inflationary pressures. Rising gas prices are not a cause of inflation. They're a symptom.

Another symptom is devaluation of the dollar.

Mortgage rates are based on the price of mortgage bonds and mortgage bonds are denominated in U.S. dollars.  As the dollar loses value, so do mortgage bonds.  This causes demand for bonds to fall and so mortgage rates have to rise to attract new buyers.

Again, a symptom of inflation but not the cause.

This year, the "cause" of inflation may be two-fold -- higher demand and a rapidly declining dollar.  There's a sense of "the bottom" among world economies right now and, just last week, the dollar had its worst showing since 1985.  This is a powerful one-two punch that has beat-up mortgage rates badly in the past.

It's likely to beat-up mortgage rates again this year, too.

Inflation is not yet in bloom, but the seeds are planted.  Oil prices are rising, the dollar is falling, and the government is printing a lot of money.  Keep an eye on your gasoline pump -- the higher those prices go, the higher mortgage rates are likely to go, too.