Prior to the Iran war, the average mortgage rate was 5.99%. Today’s average is closer to 6.4%, and our brief purchase-and-refi boomlet has come to a screeching halt.
Rates shot up so quickly because oil prices shot up so quickly – from about $65 per barrel (WTI) to about $94 per barrel today.
So that is why loan officers and real estate agents should care so much about oil prices; they have an enormous influence on rates.
This will prove to be a very good thing, and a very bad thing – and I will explain why below.
Fascinating Factoid: In 1973, while I was home playing with my Hot Wheels and Big Wheel and listening to Elton John sing “Crocodile Rock,” OPEC banned oil exports to the U.S., and OIL PRICES QUADRUPLED. That would be the equivalent of oil prices going to $260 per barrel today. If that happened, the world economy would get crushed, and millions would lose their jobs. So, this is just me reminding readers what we poor boomers went through, besides disco, feathered hair, shag carpeting, and tight polyester (and fat guys exposing their chest hair – which is where the government should have stepped in).
Renowned energy analyst, Doomberg, blogged about oil today and shared a few more fascinating factoids.
- Oil only accounts for about 1/3 of global energy consumption, making it that much more interesting that it has so much influence. Oil accounted for over half of global energy consumption in 1973, but it has been getting replaced by nuclear, renewables, coal, and natural gas.
- The oil markets are amazingly efficient, as the players are huge and very savvy. So, the fact that oil prices are not higher right now indicates that sophisticated players do not expect the issues in the Middle East to escalate (a point I have made several times). With billions of dollars on the line, energy traders look at every possible outcome and exigency before placing their bets.
- High prices always attract more supply, which always brings down prices. This is happening now. So, when the Iran war ends, the world will be awash in supply – and prices will very likely plummet to much lower levels than we saw before the war.
And this is the point of my blog.
Given how much increasing oil prices pushed up rates, we can likely expect plummeting oil prices to reduce rates in a similar manner – given how much oil prices influence all other prices.
So yeah, I would not be surprised to see $50-per-barrel oil (and neither would Doomberg and many other analysts) – and that is a very good thing because it portends much lower mortgage rates.
It is a very bad thing, though, too, because very low oil prices also portend much lower borrowing rates for the U.S. government – and that gives our spend-like-a-drunken-sailor politicians an excuse to be even more “drunken sailory.”
SIDEBAR: One of the reasons we did not see more inflation in the 30 years leading up to COVID, despite our spending, borrowing, and money printing, was because of deflationary pressures from China (cheaper goods), falling commodity prices, and improved productivity. The government had nothing to do with any of that, but politicians did use low inflation as an excuse to spend more money. And, they’ll do so again.
