Since December 2018 we’ve seen the price of oil move from $42 a barrel to $66 a barrel (April 2019). Oil is a very important component when figuring out the direction of inflation. And the one thing that mortgage rates “hate” the most is inflation. Higher inflation usually leads to higher mortgage rates.
But wait; oil has moved significantly higher in 2019 and mortgage rates for both refinance and purchase transactions hit near a two year low late March.
So if higher oil equals higher inflation which equals higher mortgage rates then why didn’t that happen in 2019?
Not An Exact Science:
When it comes to the direction mortgage rates move in you’ll want to avoid the mistake many people.
Avoid saying: "since ____ happened mortgage rates will do ______."
The only time where you can say the above is when Mortgage Backed Securities selloff. When that happens mortgage rates always move higher. Other than that you really shouldn't expect the Mortgage Backed Securities market and mortgage rates to follow clear cut rules when it comes to the direction they move.
When it comes to what influences the Mortgage Backed Security marketit becomes a lot more complicated. Just because oil is higher does not mean inflation will automatically increase.
The same thing applies to other componets of inflation such as wages. Wages are higher today then they were this time last year yet mortgage rates are lower.
Or; just because oil moves down does not automatically mean inflation will decrease and mortgage rates will move lower. Since the price of oil does not directly dictate mortgage rates does that mean it's a useless indicator? Absolutely not; it actually can be helpful when you use it as one of may tools in understanding the direction of mortgage rates.
How To Use The Price of Oil When Looking At Mortgage Rates:
As you can see higher oil does not always mean higher mortgage rates however we can use the price of oil to guide us with our view on the direction of the Mortgage Backed Securities market and consumer mortgage rates.
Seeing oil move back towards multi year highs makes us aware that the economy is at risk of rising inflation due to higher input costs associated with oil. And because the economy is at risk of higher inflation due to the rising cost of oil when can better prepare ourselves if and when that happens.
Use the price of oil as a tool (one of many when looking at mortgage rates); not as a crystal ball.
