August 26th, 2014 11:47 AM by Nick Rapplean
Oil and Rates
There is an old saying which revolves around the fact that oil and water do not mix. But how about oil and interest rates -- do they mix? The truth is that oil prices and rates have gone lower in tandem this summer. There was a time when the economy could be stopped or started with a change in either energy prices or rates. However, today the effects are not as clear. For example, changes in gas prices don't seem to affect the consumer as much as they did decades ago. There are several reasons for this, but one important factor is the increase in energy efficiencies.
On the other hand, the magnitude of the effect of interest rates does not seem to have lessened, but it is hard to tell with rates remaining so low for the past several years. For example, last year when interest rates started to rise, the real estate market responded by eventually slowing down. Again, the direct effect is not as clear as it always has been. For example, so many in America refinanced at record low rates in the past few years, the rise in rates not only slowed down the pace of refinancing, but also made homeowners more reticent to put their homes on the market. Why leave a home which has such a low mortgage payment? This phenomenon has contributed to a shortage of listings which has in turn contributed to the slowing down of the real estate recovery.
Will the more recent decrease in rates reverse this trend? We really don't think that today's rates are high enough to keep people from selling their house. After all, rates are still close to as low as they have been in our lifetime. What will stimulate real estate is the continued generation of jobs which will increase household growth and a person's confidence to make a move. Job creation may actually cause rates to rise, but as long as the interest rate increases are marginal, they won't keep new households from purchasing their first home or renting a starter home. Meanwhile, lower gas prices and lower rates right now are good news for the economy and should be celebrated while they last.