How gas prices on the rebound can affect the mortgage market
Yesterday, the U.S. crude dropped to $48.58 per barrel that became a source of minor relief for Americans. However, the feeling may not last too long as the past week already demonstrated price increases by cents. Monday’s price was at $48.81 as tighter supply puts pressure on the cost. Analysts have warned that the 5-month dive in gasoline prices has finally reached bottom and is likely to get back to higher levels this year. Last month was a hit for drivers when oil was only valued at $33 per barrel. Last week wholesale gasoline prices were up by 40 percent which is a sign that many perceive to be an imminent trend leading to last July’s peak numbers.
Among the reasons for the recent price rise is the gripping tension between Israel and Gaza. The market reacts very strongly to political situations and the OPEC easily cuts production to match increasing demand. These add pressure to oil price hikes and consumers have always been at a disadvantage. John Porreto of Businessweek reports, “Some analysts say oil could eventually eclipse $150 a barrel, maybe even on its way to $200. In such a scenario, gasoline would easily cost more than the record high of $4.11 a gallon set last summer. Oil trades at about $50 today.”
Homeowners struggling with their mortgage payments have been beaten too much by the soaring oil prices last year. That meant cutting back on their expenses, fewer road trips and diminished savings. And unknown to many, oil has its other effect in the mortgage industry too. Holden Lewis of Bankrate.com cites financial analyst Harvey Hirschhorn four years ago, “The bond market furthered its recent trend of moving in lock step with oil prices: Higher oil prices, lower yields; lower oil prices, higher yields… Higher energy prices could add fuel to inflation, too—and rising prices would put upward pressure on interest rates.”
In other words, middle and low-income Americans are burdened by paying for commodities that are priced higher because of more expensive transportation costs. It lowers their savings and curtails their normal consumption of goods. This would slow down the economy and therefore mortgage rates will rise to counter higher risks from borrowers. Today’s low mortgages do not somehow reflect the reverse of this theory since the government has exerted influence in the mortgage industry to artificially affect rates.