NEW YORK (MainStreet) — With the U.S. invading Libya and political unrest unraveling across other key Arab states like Egypt and Syria, the price of oil is skyrocketing these days. What does that mean for mortgage rates? Quite simply, higher rates and more expensive mortgages.
Higher oil prices tend to push interest rates—and therefore mortgage rates—higher because the health of the U.S. dollar is tied to oil prices. The dollar is the primary currency measured against oil prices, and higher oil prices reduce the value of the buck.
Right now, the price of a barrel of crude is about $108.00, a 30-month high. Factors impacting the price of oil include the U.S.-led military intervention in Libya and the continued economic fallout from Japan’s earthquake. Libya may only account for 2% of the world’s oil production, but Arab nations are understandably anxious about any military and political unrest in the region. Even without the Libyan situation, the “normal” price of crude oil would be about $90-$100 per barrel.
The price of running a business or filling a tank of gas to commute to work every week (or more) also pushes up mortgage rates. So with more money needed to keep industries rolling, as well as to keep Americans’ cars on the roads and lights on in their homes, that means less cash that businesses and consumers will have for other economic needs. That then slows economic activity, as businesses raise prices to keep profits coming, which can also trigger higher inflation, a scenario that usually leads to higher mortgages rates.
Inflation is a particularly strong driver of mortgage rates. Bond investors know all too well that fixed income securities provide a “fixed” return. Inflation lowers the value of bonds (like U.S. Treasuries) that fall in value, as investors stampede to sell them and look for a higher-returning investment (like stocks). As the prices of U.S. treasuries decline, the government has little choice but to raise interest rates to attract new buyers.