Oil prices are on the move, crossing $80 per barrel for the first time in a year.  The charge can't be coming at a worse time for mortgage rate shoppers.

With Wall Street already in debate about inflation, the surge in crude just adds fuel to fire.

Meanwhile, you may have that noticed gas prices are up this week.  A lot.  Use this as a clue -- higher mortgage rates are coming.

Better than any other "everyday cost", rising gas prices often foreshadow rising mortgage rates.  The relationship between the two indirect, but worthy of an examination.

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

Today, oil prices are rising for all three of these reasons.

As oil prices rise, higher energy costs spill over into everyday life, creating inflationary pressures. Rising gas prices are not the cause of inflation, mind you. They're a symptom of inflation.

Another symptom is the U.S. dollar's devaulation.

Meanwhile, because the U.S. dollar is denomination in which mortgage bonds are priced, when the U.S. dollar loses value, mortgage bonds lose value, too. This makes them a less-attractive investment and bond prices drop.

When mortgage bond prices fall, mortgage rates rise.

Inflation is not yet in bloom in the U.S., but the seeds are planted.  Oil prices are spiking, the dollar is fading, and the government is printing a lot of money.

Mortgage rates are up 0.500 percent from their early-October lows.  They'll likely tack on another 0.500 percent before the New Year.  If you're wondering whether it's the right time to lock, the answer is "yes".  You may have missed the market bottom, but today's rates are terrific compared to what we should see just 8 weeks from now.

To get rate quotes and weigh your choices, so we can talk about your mortgage. I answer all my own emails.

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.

If you study mortgage rates long enough, you realize that "good mortgage rates" are under constant attack from a number of sources, including:

• World events and geopolitics
• U.S. employment data
• U.S. government and policy
• The price of oil and gasoline

And this is just a sampler. 

There are literally thousands of reasons why mortgage rates behave the way they do and it's why there's no perfect answer to the question everyone wants to asks:

Read the rest of this entry »

Crude oil crossed $130 per barrel last week, taking gas prices along for ride.  Over the last 90 days, unleaded gas is up 25 percent and appears to be heading higher.

Americans are battered by higher pump prices but are still living their lives.  Unfortunately, the mainstream media throws salt on the gas price wound as often as possible.

In fact, with respect to gas prices, there's a lot of crazy talk in the media right now -- about how Americans are going broke; about how the global economy is off its rails; about the need for government intervention to protect the people.

And, it's very easy for laypersons to feel panic about the situation because media personalities can be very convincing. 

Thankfully, there's Google to provide some perspective.

Since oil first crossed $30 in 2003, the media has spouted Gloom-and-Doom each time that oil crosses a milestone number.  Its calls for economic demise have yet to be correct -- even though oil has more than quadrupled in cost since 2003.

Let's look deeper at milestone oil prices and the corresponding newspaper headlines since 2003 to see this in action.

Read the rest of this entry »

When energy costs increase, there are two ways it can knock the economy out of equlibrium:

1. Businesses cut back on spending, creating a recessionary ripple effect
2. Business pass on higher costs to consumers, creating an inflationary ripple effect

But when energy costs increase rapidly, the ripples can make like a splash, sinking the mortgage market along with the entire economic ship and when the mortgage market fails, prices drop and rates go up. 

In part from this week's rally to $135 per barrel, oil prices are now up 50 percent since February.  It's one reason why mortgage rates spiked this week.

As the price of crude oil hovers near $108 per barrel, economists wonder how the economy will respond.

There's talk of a complete economic shutdown; talk of gouging by oil companies; and talk of the need for government intervention.

This is all old hat by now.

With every crude oil milestone of the last 7 years, fears of recession renewed and these ongoing, high-oil-price worries persisted even as the U.S. economy was heading through its biggest growth spurt ever.

• 2003: Oil at $30 per barrel.  Recession is feared.
• 2004: Oil at $40 per barrel.  Fault the war.
• 2005: Oil at $60 per barrel.  More recession fears.
• 2006: Oil at $70 per barrel.  Household budget worries.
• 2007: Oil at $80 per barrel.  Housing is the big worry.
• 2007: Oil at $90 per barrel.  Recession is likely.
• 2008: Oil at $100 per barrel.  Economy on the highway to the "Danger Zone".

For all of the hyperbole, though, concerns about high crude prices are not displaced; crude accounts for 59 percent of the cost of gasoline at your favorite gas stations.

Economists worry about high gas prices because for every dollar Americans spend on fuel, it's one less dollar to spend on discretionary items like the best chocolates in Cincinnati.

Some people say every penny increase pulls $4 million from the economy.

If that's true, the 27-cent increase since mid-February has robbed businesses of $108 million.  That's a lot of money, and then we go and put it in perspective: $108 million is the same amount that Sir Paul McCartney is paying ex-wife Heather Mills as the terms of their divorce.

So today, oil prices forge higher and gas prices reach an all-time, inflation-adjusted high.  Americans have dealt with it before, and we'll deal with it now.  We're no more fazed by $3.00/gallon than we were by $2.00/gallon than we will be by the inevitable $4.00/gallon coming soon to a pump near you.

Consumer spending may take a short-term hit but Americans have shown an amazing resiliency in the face of strong inflation headwinds.  If recession comes, it won't be from high gas prices -- it will be from something else.

The steady rise in gas prices is a constant with which we've all learned to live.

Just like the Foo Fighters and the Phillies.

The price of oil scraped $100 per barrel yesterday and the experts haven't stopped talking about what that will mean to the U.S. economy.

Some say that it will push the economy into recession.  That would be good for mortgage rates.

Some say that it will push the economy into inflation.  That would be bad for mortgage rates.

Some say it will do both at the same time, a condition called "stagflation".  That would be awful for mortgage rates.

Either way, it's like The Truman Show.  Everybody's talking about it and nobody knows how it's going to end.

Just look at the screenshot above, taken from yesterday's Wall Street Journal.  Two pieces were running on the same topic: one saying oil prices will go up, the other saying they'll fall. 

That's indecision at its best (or worst).

Let's put the rising oil prices in perspective.

• In 2004, oil passed $40 per barrel
• In 2005, oil passed $64 per barrel
• In 2006, oil passed $78 per barrel
• In 2007, oil passed $95 per barrel

And today, oil touched $100. 

Yet, over the last three years, the economy has not materially slowed down because Americans continue to propel the it forward with spent dollars.

It takes 10-14 days for oil prices to work their way to gas stations, so before we start speculating about how Americans will react to higher gas prices, we can tune into tomorrow's jobs report. 

With oil prices up, expect traders to be hyper-sensitive to variance from the 70,000 expectation.  Anything lower, rates should fall on recession worries.  Anything higher, rates should rise on inflation fears.

Even though the variance is insignificant.

Source
Weakened U.S. Economy May Be Facing New Test
Sudeep Reddy
The Wall Street Journal Online, January 3, 2008
http://online.wsj.com/article/SB119930367405362875.html

I'm not a huge reader of USA Today, but I happen to be at hotel on Long Island this morning and McPaper showed up at my door this morning.

Surprising to me, there are a few interesting stories in the Money section.  So, as we usually do, let's relate them to mortgage rates.

World events work against grain buyers
Bad weather and surging global demand has created the tightest grain stock in 30 years.  Wheat prices are skyrocketing food companies have a choice -- absorb the costs, or pass them on to consumer?  Either way, mortgage rates should benefit because less dollars are being spent on capital and/or consumer goods.  A slowing economy retards inflation.

Fed chief's outlook: 'Uncertain'
Ben Bernanke says that housing is likely to be a significant drag on the economy through early 2008, and that conditions in financial markets have improved since "the worst of the storm" in mid-August.  Half of Bernanke's job is to help keep markets calm so this speech may have been a giant preview for the October 30-31 FOMC meeting. 

Oil surges to record, but gas prices don't follow suit
As with wheat prices, it's only a matter of time before producers pass on rising costs to consumers.  One major storm or cold spell and prices could rise not only at the pump, but in our homes as well.  This normally pushes mortgage rates lower because higher costs forces disposable income to drop, thereby slowing the economy.

Justin Timberlake and Scott Wolf dine at Mawat; Unaware of Mortgage Planner Dan Green
Okay, this story didn't show up in USA Today, but it happened.  I wondered why it took nine waiters to serve that table next to me until I looked over.  Neither was impressed with my new haircut.

That's all, folks.  Bring it on in to Omeletteville.

Crude oil crossed $78 per barrel today and is nearing its all-time high of $78.40.  Meanwhile, gas prices are continuing on their drastic downward trajectory, according to gasbuddy.com.

But, just because because gas prices aren't going up (right now), it doesn't mean that the run-up in crude oil is contained.

Crude oil is used to make gasoline, but it's also in the production of other products, too.  In fact, only 20% of a barrel of crude oil ends up at your local gas station.

Crude is a raw material and higher raw material costs have to get made up somewhere by the companies along the supply chain. 

We'll have to keep watching to see how this manifests itself going forward.  Maybe airline tickets?  My flight to Fort Lauderdale this September jumped by $100 overnight last night.  I wish I had booked Sunday.

Today, mortgage rates are flat.  If oil happens to pop $80 in the coming days, though, expect for rates to fall.

(Image courtesy: Department of Energy)

The price of crude oil briefly touched $76 last week and has since retreated to $72, but gas prices look like they're about to play a game of catch-up.

After six weeks of declining fuel costs nationwide, the cost to fill a gas tank was up for the first time in nearly two months. 

This is usually good news for mortgage rate shoppers because higher gas prices should lead to less disposable income for the American Consumer.  However, consumers have shown an amazing resiliency economic shocks in the past 12 months.

If there's one lesson we've all learned a thousand times over, it's that Americans buy the things that they want, when they want them.  This consumer culture/attitude makes it much less likely that rising gas prices will slow down the economy, thereby reducing inflationary pressure.

Inflation is the enemy of mortgage bonds so -- in a normal situation --rising gas prices would lower mortgage rates.  Don't expect traders to make that mental leap this time around -- they'll wait to see something more "concrete" in the form of data, or for crude to top $80.

After a week in which the Fed expressed concern that "inflation may fail to moderate as expected" and the dollar did little to emerge from a long-running funk, this could be the week that the University of Michigan Consumer Sentiment Survey actually matters.

Stop me if you've read this one before: Consumer Spending makes up 70% of our economy.  When the cost of living increases for Americans, it has far-reaching implications that eventually trickle down to mortgage rates.

What people say and what they do are often two very different things but there eventually comes a tipping point where you have to pay attention.

This week may be that week.

First some background:  I don't drive a whole lot.  I live in Chicago and am walking distance to the El.  On weekends, I walk places unless I am headed to Dominick's, Costco or Trader Joe's.  For dinner or theater, we usually cab.  My car gets one new tank every 2-3 weeks, if that.

Now, check out the receipt at right.  This was my first $50 tank of the season.

My car is not large and neither is my tank, but I can't say the same thing for other Americans.  This is the Land of the SUV and we're all paying at the pump.  Surely other people are feeling the pain worse than me. 

And then you have the people that The New York Times calls Extreme Commuters.  They're getting punished, fer sure.

Back to my point.

The Consumer Sentiment survey is largely a waste, but when guys like me who rarely get behind a wheel notice that prices are moving higher, it helps to remind us that there are people that fill up their tanks 2-3 times per week.  That makes a major dent in a family budget.

Sooner or later -- if gas prices remain high -- there will be a breaking point for the consumer and that will spill over into other parts of the economy.  It's not a coincidence that credit card spending rose 209% in April.  Consumers may be using that last Visa and Mastercard lifeline as we speak.

Friday's survey is expected to show weakness, but if that weakness is over-the-top, there will be strong downward movement in mortgage rates as expectations for a slowdown pick up speed.   

Don't look now, but Bloomberg is talking to economists who say that $4.00 per gallon of gas is not out of the question.

Core CPI showed just a 0.1% increase last month.  This is less than forecasted and is normally a precursor to falling mortgage rates. 

If we add back in the costs of energy and food to the CPI figure, though, the number jumps to a 0.6% increase.  This is the largest increase since last April when hurricane fears fueled gas price surges.

Author's Note: Sorry for the pun on "fueled" and "gas prices".

Despite increasing gasoline costs, however, Retail Sales continued to surge higher.  Excluding gas sales, sales growth registered 0.4% in March for an annual increase of 3.8%.

As a home owner, the co-existence of rising gas prices and sales receipts is rather interesting and revealing.  Even though Americans have fewer discretionary dollars each month, they are spending more of them.

Rising gas prices is a drag on the economy and that normally pulls mortgage rates down.  Rising retail sales is a boost to the economy and that normally pushes mortgage rates up. 

It's unclear whether gas prices will beat down the American consumer and win this Tug-O-War, but the story has started making headlines and entering the public consciousness.

The more that happens, the better it is for mortgage rate shoppers.  It pushes the see-saw in favor of wallet-watching which restricts the amount of dollars entered into the economy.

Oil fell to $56 per barrel today.  Lower prices should reduce winter heating bills and gas pump receipts for Americans.

Money saved is money spent in this country so, if the price of crude continues to drop, we can expect the economy stay juiced with consumer dollars.  Throw in a refuse-to-die housing market and we could have the makings for Fed Fund Rate hike in 2007.

With only one major economic report this week -- Friday's Retail Sales report -- expect Fed speakers and geopolitics to keep markets guessing.  The recent trend has been for rates to move higher and traders will ride the trend in the absence of convincing data.

Don't look now, but increases at the gas pump are on the way.

Over the past 10 days, both wholesale gasoline and crude oil prices have increased in response to Saudi Arabia, Iran, United Arab Emirates and Nigeria.  These nations are key members of OPEC and they have helped to cut crude oil delivery by 1.2 million barrels per day.

Less supply with no change in demand means higher prices, naturally.

According to Steve Levine at the WSJ, there's often a 10-14 day time lag between the time that wholesale gasoline prices move and that movement shows up at the local gas station.

Since gas prices have fallen from their August highs, many Americans have used their "spare money" to buy stuff, propelling the economy forward.

If gas prices rise over the next few weeks, expect mortgage rates to face downward pressure in response.

Wholesale Gasoline Prices Rise, Cost At Pump Could Follow Suit
Steve Levine, Wall Street Journal
October 28, 2006
http://online.wsj.com/article/SB116199425629706674-search.html?KEYWORDS=wholesale+gas&COLLECTION=wsjie/6month

As gas prices marched to $3.30/gallon in Chicago (and $3.00 around the rest of the country) starting last Winter, market players feared how consumer spending would be impacted.

• Would retail sales be harmed?
• Would inflation overtake the markets?
• Would ethanol replace gasoline?
• Would hybrids outsell SUVs?
• Would gas hit $4.00/gallon and shut down consumer spending entirely?

And yet, consumers remained resilient and the spending continued. 

This confounded the experts, but on a common sense level, I don't think many people were surprised.  After all, since when did the new Consumer Culture bow down to anything?

Now that gas prices are coming down and consumers are no longer feeling as "tight", they seem to be taking a "newfound wealth" approach to their good gas price fortunes.  I'm not saying it's smart, but we can't deny that it's happening. 

For example, the August Retail Sales report was expected to show a decline because of the high gas prices.  Instead, it showed an increase.  Not so strange when you think about how Americans love to buy stuff. 

This report reminds us that Americans buy what they want, when they want them. 

It didn't matter that wallets were pinched by rising gas prices -- Americans still went out and bought the things they wanted to have.

And now that gas prices are falling, consumers will likely take the money they're saving on the gas "sale" and pump it right back into the economy.  We won't have data to back up the assertion until mid-October, but the prediction should be right on track.

As a mortgage shopper (or homeowner), this behavior is not your friend. 

More consumer spending propels the economy forward, and places pressure on the Fed to stop inflation by raising the Fed Funds Rate.  The FFR is not related to mortgage rates, but if the Fed says that it's concerned with inflation, mortgage rates run higher in response.

Mortgage rates followed gas prices higher this summer, but they may not follow them back down.

This is because of the risks to the nation's oil supply that have not fully subsided.

The Good: There have been no major storms to disrupt oil pipelines and supply in the United States.

The Bad: Hurricane Season is not over.

The Good: Iran has held the U.N. at bay about their nuclear program and that has kept oil embargos from being enforced

The Bad: There's still no resolution in Iran

The Good: Nigerian rebels have not sabotaged oil pipelines

The Bad: They are armed and threatening the supply

The Badder: Russia has revoked environmental permits tied to a $20 billion pipeline project

The Worse: Global demand for oil is not getting smaller. China and India forge ahead and Americans still drive their guzzlers.

When we look at gas prices coming down, it's because threats to supply have fallen more than demand for oil has grown.

However, we are just one major event away from a huge spike in prices. There isn't enough extra production capacity in the markets to handle a supply-side shock.

When gas prices headline the news, it generally means that people are concerned enough to be talking about it.  A lot.

Well, let's play out the chain of events and see what higher gas prices takes us.  We will assume that gas is now $0.65 higher today than it was three months ago. 

We'll also assume the following:

• Driver's vehicle uses one gallon for every 16 miles in stop-and-go traffic
• Driver's commute is 25 miles (Oak brook to the Loop, or Northbrook to the Loop, Schamburg to Naperville), 50 miles round-trip
• 500,000 people drive to work in Chicago

If our assumptions are correct, the average driver uses 3.125 gallons of gas per day commuting to work.  Gas costs more, so the drive now costs an extra $1.875 per day, or $9.38 weekly, or $37.52 monthly.

(500,000 people) * ($37.52 monthly) = ($18.7 million monthly)

$37.52 monthly is not a back-breaker, but it's enough that folks take notice.  When a $40 tank of gas becomes a $50 tank of gas, it has measurable psychological impact.

Consumer Confidence should fall next month. 

As the news covers the hike in gas prices, and as Washington D.C. drafts bills about high gas prices, the issue will get more front-page press.  The more that the public hears about the problem, the more aware they'll be that something is wrong.

And then, the public then starts to conserve. 

Suddenly, people are buying one fewer item at the grocery store; or, one fewer drink at the bar; or, one fewer Jim Thome Sox It Thome T-Shirt.  It slows down the economy.

$18.7 million spent on gas is $18.7 million not spent on other things that matters to Americans.  And that's just in Chicago.  Around the country, it may be enough to stop the tide of inflation.

That should help push mortgage rates down.

At the start of 2004, economists were concerned that $40 barrels of oil would tear down the House of Cards that was the expanding U.S. economy.

The Federal Reserve was not convinced; it started a series of increases to the Fed Funds Rate to slow down inflation.

Oil creeped to $50 per barrel.  The economy continued to surge ahead.  The FOMC continued to raise the Fed Funds Rate to rein in inflation.

Today, oil is settled around $64 per barrel and the economy is still showing signs of growth.

I raise the point because the consensus opinion from economists is not always right, nor is it always wrong.  It is there to shape discussions and give guidance to the markets.

Because investors pay close attention to consensus opinions, any "wrongness" in those opinions can really rattle mortgage rates.

If today's trading is based on an economy-halting $65 per barrel, how will we react if that price is even higher 18 months from today?