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Chrisman's Corner: Link between Gas Prices & Mortgage Rates?

Our brokers have seen the Fed change short term rates, and now we’re seeing turmoil in Asian stock markets moving our rates. But what about gas prices? Do they impact JMAC’s mortgage pricing and in turn our brokers’ business?

The average gas price in the U.S. for November 2015 was $2.17. $2.17! That is down from $3.60 average in the summer of 2014 due to the dramatic decline of crude oil prices which fell from $102.51 a barrel to $60.70 in the 6 month span between June and December 2014. The steepness of the decline is second only to the collapse during the 2008 economic crisis when oil fell from $129 to $37 per barrel within six months.

Both supply and demand factors have played a key role in the recent period. On the supply side, U.S. shale production rose due to technological innovation, and Middle East oil output grew. On the demand side, sluggish global growth constrained consumer purchases. Studies, not surprisingly, have shown that a portion of oil price changes passes to consumers—but crude oil represents only 47 percent of the retail cost of gasoline while the remainder is taken up by refining, distribution and marketing costs, and taxes.

Electricity and petroleum-related lubricants and fluids respond little to changes in oil prices. And analysts say that even if the price of oil were to plummet to $0, the price we pay at gas pumps would still be about $1 per gallon due to transportation, refining, etc.

How long does it take consumers to realize the impact of a drop in crude oil prices in what they pay for energy and other products? It is pretty fast: about 80 percent of long-run pass-through is achieved within the first month after a crude oil price change.

The impact on all of this for your clients is initially beneficial (due to lower gas prices and a slowing economy leading to lower rates) but, over time, the slowing economy will harm economic growth, which is not good.