Q: I've noticed prices at the gas pump have started heading up again. What could that mean for mortgage rates?
A: It was bound to happen, right? Gasoline gave consumers a nice break for a few months there, but it was never going to last. As gas prices start to make their way back up, mortgage rates are sure to follow.
Retail gas prices bottomed out around the end of January, when they were more than $1.60 a gallon cheaper than they had been at the middle of last year. They have since gained back over 60 cents a gallon, a 30 percent increase in less than four months.
All of this matters because mortgage lenders seek to build in a cushion over inflation when they set interest rates. The higher they expect inflation to be, the higher interest rates have to be to maintain that cushion. Naturally, gas prices are an important input to inflation. Thus, just as falling gas prices likely played a role in falling mortgage rates earlier this year, the opposite could be true as gas prices rise.
How does this affect consumers? Whatever your involvement with the housing market - whether you are a potential buyer, an existing home owner, or even a potential seller - higher mortgage rates could impact your plans:
- Prospective buyers should get serious about house hunting before higher mortgage rates reduce what they can afford.
- Long-term home owners should weigh their refinancing and home equity loan options before they get more expensive.
- Home sellers may want to be flexible about any reasonable offers, because higher mortgage rates could start to dry up buying demand.
It can be a week-to-week annoyance when every stop at the gas station costs a few dollars more. Beyond that though, the impact of higher mortgage rates could be felt for years to come.