The Mortgage Moment

Mortgage rates are hugely important to household budgets.

Lower mortgage rates free up household cash for spending and long- and short-term saving.

Higher mortgage rates, of course, do the opposite.

Unfortunately, it’s impossible to predict the future of mortgage rates with any bit of certainty. This is because there are countless influences on mortgage markets, ranging from the obvious to the obscure.

Some obvious influences include:

• The strength of the U.S. dollar
• The rate of inflation in the U.S. economy
• The relative performance of the U.S. housing market

And some of the obscure influences include policy decisions by the Bank of Canada, or political unrest in Nigeria.

But despite the challenge of making accurate mortgage rate predictions, we shouldn’t stop looking at trends for clues. The graph at top shows one such trend.

Starting in January, as oil prices rose, mortgage rates followed them higher. Then, as oil started its descent in mid-July, mortgage rates began to fall, too.

The relationship between oil prices and mortgage rates is not one-to-one and, most likely, the similarities are there because both oil prices and mortgage rates are pegged to the ever-stronger U.S. dollar.

As the dollar gets stronger, it’s pushing oil prices and mortgage rates down, and improving household cash flow for home buyers and other people in want of a new home loan.

For the first time in 4 weeks, mortgage rates closing a week lower than where they opened it

Markets shrugged off uncertainty about Hurricane Gustav and chose to rally on the backs of strong economic data.

Overall, rates were down by about 0.125 percent, or $96 per year per $100,000 borrowed.

Markets were influenced by a handful of positive news last week — two pieces of housing data gave markets reason to celebrate, as did an upbeat consumer confidence survey.

• Sales of “new” homes is reducing the glut of builder homes
• Sales of “used” homes is showing stability
• Americans, in general, are feeling better about the economy

In addition, equally-important-but-less-well-known data from last week points to similar conclusions — the U.S. economy may be on more solid footing than many people had believed.

This week, markets re-open Tuesday after being closed for Labor Day. Early in the week, there isn’t much data for markets to digest so expect oil markets to take center stage.

First, markets will gauge the damage that Hurricane Gustav caused to oil and natural gas pipelines that dot the Gulf of Mexico shorelines. Then, it will project the damages based on the projected paths of the next storms, Hanna and Ike.

Typically, more damages means higher oil prices and that can lead to higher mortgage rates long-term.

By Friday, though, markets will shift attention to the jobs report.

American businesses have shed jobs in each of the last 8 months, and August is expected to show the same. The jobs report’s influence on mortgage rates can be enormous so expect big rate swings Friday, either up or down.