What path one senior economist sees for mortgage rates
Ever since the war with Iran began, the price of oil has become a hot topic in the US economy.
The question mortgage brokers want to know is how oil prices impact mortgage rates, if they impact them at all. The answer revolves around inflation, how that impacts Treasury rates, and what the Federal Reserve does in response.
First off, some good news on the oil front. President Donald Trump said Monday morning that they are hopeful that they will make a deal with Iran, which could bring hostilities to an end. This could allow oil prices to drop, which would then lower inflation.
On that news, crude oil futures dropped below $90 a barrel on Monday after closing at nearly $100 a barrel on Friday.
Fed members who have spoken since last week’s meeting are mindful of the impacts of inflation and the uncertainty of the conflict in the Middle East. If inflation shows a meaningful decline, the central bank can get back to cutting rates.
Sam Williamson (pictured top), senior economist at First American, said that the concern for the mortgage market comes in long-term inflationary impacts rather than one-time spikes.
“For the mortgage market, the bigger issue is not the initial oil spike, but whether higher energy prices become embedded in the broader inflation outlook,” Williamson told Mortgage Professional America. “If the move proves temporary, mortgage rates are unlikely to react much beyond some near-term volatility.”
Impacts on Treasury yields
If energy prices stay higher for longer, Williamson said that’s when you could see more drastic impacts on Treasury rates, which could then cause a rise in mortgage rates.
“If higher oil prices persist and begin to spill over into other goods, services, and inflation expectations, longer-term Treasury yields could move higher and pull mortgage rates up with them,” Williamson said. “Because higher energy prices can also weigh on growth, the market response is not always straightforward. That is why persistence matters more than the headline move itself.”
Williamson said that even though mortgage rates and Treasury yields have risen, it doesn’t appear that this short-term jump will have a longer-term impact on the market.
“Mortgage rates loosely follow the 10-year Treasury yield, which is shaped more by longer-run expectations for inflation and growth than by day-to-day headlines or the Fed’s overnight policy rate,” he said. “While recent geopolitical developments have added near-term volatility, markets do not yet appear to be pricing a prolonged inflation shock.
“For now, investors seem to view the current episode as one that has not materially changed the longer-run outlook, which helps explain why mortgage rates have held in a relatively narrow range, despite elevated uncertainty.”
After the Fed announced its rate hold last week, Fed chair Jerome Powell said the eventual effects of the Middle East conflict are unknown.
“I want to emphasize, nobody knows,” Powell said. “The economic effects could be smaller or much bigger. We just don't know. If we have a long period of much higher gas prices, that is going to weigh on consumption and disposable personal income and consumption. We don't know if it will happen. I wouldn't say there is a conviction that this is going through quickly or not quickly.
“The implications of the events in the Middle East for the US economy are uncertain. In the near term, higher energy prices will push up overall inflation. It is too soon to know the scope and duration of the potential effects on the economy.”
Optimism for the spring
Despite all the new uncertainty due to geopolitical tension, Williamson believes the housing market is still in a better position than it was a year ago.
“The housing market is heading into spring on a better footing than it was a year ago,” he said. “Slower home-price growth, rising household incomes, and a modest improvement in inventory have helped improve affordability at the margin, which should support greater buyer and seller participation in the coming months, even if mortgage rates remain close to current levels.”
As far as what mortgage brokers can expect for rates over the next few months, global uncertainty will likely keep things a bit volatile, but in a similar range to where they are currently.
This could open up the door for refinances if brokers and homeowners are ready to lock rates when the market takes momentary dips. On the purchase side, if more new listings come into the market, it could keep home prices stable.
“Rates are likely to stay choppy, but broadly range-bound in the near term, allowing refinances to continue picking up during temporary dips,” Williamson said. “A key swing factor across local markets will be whether new listings continue to pick up. In markets where more fresh supply is coming online, pent-up demand has more room to translate into sales, while in markets where new listings remain constrained, activity is likely to stay contained even if buyer interest improves.”
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