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Posted 07/29/2008

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As Gas Prices Fall, Mortgage Rates Are Responding Accordingly

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:

"Do you think rates will be higher later this year?"

However!  One thing of which we're certain is that the biggest threat to "good mortgage rates" is inflation.  When inflation pressures build, mortgage rates tend to build.  And, when inflation pressures fall, mortgage rates often fall.

This is because inflation erodes the value of the U.S. dollar which makes mortgage interest worth less to the bank that collects it.  The only way to compensate the bank for the diminishing value of its investment is to charge more interest.

Hence, rates rise when inflation is present.

Earlier this summer, rising energy costs pushed inflation levels to their highest levels in many moons and mortgage rates followed.  Over the past 2 weeks, however, energy seems to be reversing its course.

Since July 15, gas prices are down 17 cents per gallon nationwide.

Of course, you've probably noticed this already and don't need me to point out the deeper implication, but when the cost of filling up your gas tank gets smaller, your personal Cost of Living gets smaller, too.  That's a good thing because falling personal costs is the opposite of inflation and inflation is bad for mortgage rates.

Now, we can't predict where interest rates will go tomorrow because too many rate-impacting factors are unpredictable.  Political events, for example.  But, we can watch some of the key indicators from everyday life and follow along at home.

Next time you fill your gas tank, take note of the gas price per gallon.  It's not an exact rule, but if gas prices are falling, you can bet that mortgage rates are facing one less reason to go higher.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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