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Oil
Prices Affect Mortgage Rates |
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As oil prices have continued
to climb this year, to unprecedented highs, the
economy will be directly affected, which will lead
to the continual rise of mortgage
rates. Louis Uchitelle, columnist for The San
Diego Union-Tribune, explains the effect of rising
oil prices in his July 23, 2006 article, “Increasing
oil prices take toll on economy.”
Uchitelle starts off the article explaining a scenario
in which Dean England, chief executive of C.R. England
Inc., checks the national average price of diesel
fuel every Monday morning.
“A formula
has evolved. For every 5-cent rise in the price
of fuel. . . C.R. England Inc. adds 1 percent to
its freight rates.” As a result, rates have
increased by 37 percent since 2003, and yet, business
has been thriving.
England explains how the market has been good to
his company. “But ultimately the extra cost
of hauling food has to fall on the consumer.”
Many other energy-dependant companies are raising
prices to keep up with the increase in oil prices.
“That is gradually adding to the inflation
rate and appears to be contributing to a slowdown
in growth.”
As inflation rises, so do mortgage
rates. Rates are currently at 6.9 percent, with
the prospect of eclipsing 7 percent within the next
couple of months. Mortgage rates have increased
in year-to-year sales for 24 consecutive months.
There is no immediate relief in sight. “Rising
gasoline prices constitute what economists sometimes
describe as a consumption tax. When such a tax is
imposed on millions of workers whose income has
not kept up with inflation in recent years, those
consumers eventually cut back on spending.”
The reduction in spending is the primary reason
economists foresee the economy slowing down.
As long as the economy is slow, mortgage
rates will continue to rise, to make up for
the lack of consumer spending.
“But
cutbacks in spending have been concentrated almost
entirely among households with less than $50,000
in annual income,” said Richard T. Curtain,
director of consumer surveys at the University of
Michigan.
Higher-income households (above $50,000) have been
able to absorb the rising energy costs without any
major cutbacks in spending. “Rising gasoline
prices are really driving a wedge between lower
and higher-income households,’ Curtin said.”
Since higher-income households can afford the rising
costs of consumer products, companies with continue
to raise prices. As airlines, railroads and even
cereal companies continue to raise their prices,
lower-income households are going to have to make
more cutbacks.
More cutbacks mean less spending, less spending
equal to a weaker economy. A weaker economy means
higher mortgage rates. Eventually mortgage rates
will be lowered to assist lower-income families
and struggling landlords, but this could take several
months or more. |
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