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The Correlation Between Falling Oil Prices and Mortgage Rates

Oil might be thought of as just another natural resource that we enjoy the benefits of today, but in all actuality; it has a direct impact on mortgage prices and interest rates. On one side of the equation, a rise in oil prices has shown to be strongly connected with the economic recessions we have experienced . The reason is quite logical: oil is a necessity for many aspects of daily life, mainly the making and delivery of food and in daily transportation needs. These are necessities for most people, which make oil crucial to survival. If the costs for these basic necessities rise, people start to cut back on non-essentials, which means they spend less, businesses lose profits, jobs are lost and a recession is the result. When this occurs, industries such as real estate, suffer as home values drop because people stop buying homes, mortgage rates go up and the housing market as a whole suffers.

On the other side of the equation, the influence and altering of interest rates along with the amount of government debt makes up the key primary ways that the government goes about "fixing" a recession. According to many economic models and platforms, output is largely influenced by the laws of demand, or to put it another way, the total amount of spending in the economy as a whole. Any other economic approach or plan that can boost the rates consumers spend and that can increase total overall national spending–either by adding in more debt or offering a spending stimulus – will increase the overall market, improve economic output and make spending easier. For the real estate and similar markets the more people are willing and able to spend, the better things are in the economy. This could mean that home values will increase, sales will become easier, mortgage rates will fall and the housing market will grow and improve.

The Unfortunate Problem

The problem that the nation now faces with the mortgage and real estate industry is that cheap oil is harder to come by, which makes sustaining current price levels and interest rates impossible. Most of the oil that would be cheap and easy to extract has already been used. Due to this, the cost of extraction continues to rise, which forces the price of oil to climb. The basic income status and wages for most of the country has not increased fast enough for people to be able to afford to buy oil and products that use oil the way they used to; this creates a direct impact on the housing industry. The price of oil will continue to fall until it becomes too low for many producers to make a profit off of it. Due to this, oil prices cannot cover the cost of the extraction or pay the companies harvesting the oil. But on the flip side, if oil prices go up and the cost of related goods and services rise too far, they will cause the nation and even the world to go into a recession. There could come a time that the government can do no more to hold the economies together.  This is why the real estate, mortgage rates and the housing market in general have been on such shaky ground in recent years.

Rising Mortgage Rates and Economy

If low interest rates are what are needed in order to offset the damage that high oil prices do to the national economy, it needs to be noted that rising interest rates will have an unfortunate and potentially disastrous effect on the market and the economy. When interest rates rise, one can expect to see a number of harmful effects, including:

• Monthly payments for a home or car will likely be higher, thus lowering the number of sales in both industry areas.
• The sales price will be lowered on existing bonds.
• Stock market prices will most likely fall, because bonds are going to seem to be a better option for investment by comparison.
• A shift into recession, with the addition of lower stock prices will be caused by poorer performance and sales for individual businesses.
• Fewer people will be looking for new homes and sales will decline and the housing market will take a tumble.
• The US government might need to initiate a rise in taxes, further pushing us towards another recession.
• Higher taxes may result in more layoffs, defaults on all manner of debts will occur, and many industries such as banks will need to be bailed out.

What the future holds is anyone’s guess and the normal ebb and flow of the market will play out as it always does. There is a strong and clear connection between oil prices and the industry market. The problem we now face in the mortgage and real estate market is that the cheap oil we have been enjoying is getting harder to obtain. Most of the oil we need for daily necessities is getting more and more expensive. Due to this, the cost of oil is going to continue to climb, but if the economy and other markets cannot keep up, people are not going to be able to afford goods, products, and services that use oil. This is the struggle that faces the nation today and is what directly drives the price and interest rates of mortgages today.