How Spiking Oil Prices Have Mortgage Rates In Tow

High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher.

Since mid-February, prices are up by 50 percent.

Rising oil prices can be a threat the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.

Strangely, it comes at a time when the "other" companies need it the most -- their costs of operating are rising, too.

So, businesses are faced with a tough choice and both options prove poor for mortgage rates.

Keep prices level and suffer smaller margins (and profits). Pass higher costs onto consumers in the form of higher prices.

If profits suffer, job cuts and weak corporate spending can undermine an economic recovery. If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.

This is why mortgage rates have spiked along with oil prices this week. And, when oil prices level off a bit, we can expect that mortgage rates will, too.

Crude oil is up 1.8 percent this morning.

(Image courtesy: Wall Street Journal Online)

cost of living oil mortgage rates Turbo Tagger

How The 84,000 Parts Of Inflation Impact Mortgage Rates

When the everyday "Cost of Living" increases, our dollars don't go as far as they used to. Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket". If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000. Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't. For example, over the past year:

Gasoline: +26%
Milk: +13.3%
Children's Shoes: +4.6%
Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.

This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source:
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

CPI cost of living inflation Turbo Tagger