Synergy Found Between Crude Prices and Mortgage Rates

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Falling Mortgages with falling gas pricesThe Wall Street Journal Blog is reporting lower oil prices may offer a hidden gift to consumers beyond the gas pump: They could also indirectly support lower mortgage rates. While indirect, there appears to be a synergy being developed between the price of crude and current super-low mortgage rates. Already, the average 30-year fixed-rate mortgage fell to 4.06% last week, the lowest level in 18 months, according to the Mortgage Bankers Association.

Concerns of a slowdown in global growth have partly pushed down oil prices, and those fears have also pushed down yields on longer-term Treasuries, to which mortgage rates tend to closely follow. And mortgage rates tend to closely track the 10-year Treasury.

“The oil collapse of 2014 appears to have been a key driver” of lower interest rates this year, wrote Chris Flanagan, a mortgage-rate strategist at Bank of America Merrill Lynch, in a report last week. “Further oil price declines could lead the way to sub-3.5% mortgage rates.”

After rising earlier this year, rates have drifted below 4.25% during the second half of the year. “We have maintained the view that 4% mortgage rates are too high to allow for sustainable recovery in housing,” he wrote, adding that a drop to the 3.25 percent to 3.5 percent range could increase “supply from both refinancing and purchase mortgage channels.”

Mortgage rates fell below 3.5% in 2012 and early 2013 amid the Federal Reserve’s latest round of bond purchases designed to stimulate economic growth. Rates spiked in June 2013 to around 4.5% amid concerns over how and when the Fed would exit from that program.

Rising rates choked off the latest in a wave of refinance booms, and many economists have said the speed at which rates jumped also cooled down home-buying activity.

So, will lower rates help strengthen the real estate market and spur more consumers to jump into home ownership? So far, the evidence doesn’t show a rush to buy homes.

Even though rates were at their lowest since May 2013, mortgage application volume decreased 3.3 percent on a seasonally adjusted basis from the previous week, according to the Mortgage Bankers Association. Still, a decline in mortgage rates might spur more people to buy, Flannigan wrote.

The Bank of America Merrill Lynch analysis notes a “non-trivial possibility” of reaching the 3.25% to 3.5% range on the 30-year fixed-rate mortgage if the slide in oil prices is sustained, which could significantly boost refinancing and new purchase-loan demand.

Applications for home-purchase loans last week stood around 5% below their levels of a year earlier, while refinancing activity was down 3%.