Sunday, August 31, 2008

Watch the Weather Impact Mortgage Rates

Hurricane Gustav is bearing down on the Gulf of Mexico, causing mortgage rates to riseThree years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous.  The 2005 storm shut down 30 platforms and 9 refineries.  And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm. 

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it's worth paying attention to. 

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy.  And at no time was this relationship more evident than in May and June of this year.  As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets -- the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too. 

And this is one reason why mortgage rates are ticking higher this morning -- there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise.  It's basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday.  If the storm continues on its path, we may see mortgage rates continue to trend higher.  If the storm dissipates, rates should reverse.


Fred Glick said...

Hey Bill,

You are correct that if oil prices go up you may see rates go up.

But, it is a futures market. If after the initial flurry, things calm down (in a few days), rates will go back down because the state of the economy is not that good.

The advise I give is to wait to lock in a rate for about a week.

Fred Glick
25 years of mortgages! said...

Oil, schmoil. I'll be flying a kite with a key tied to it at Bonita Beach.