Will Gas Prices Affect Home Sales?

Freddie Mac argues that home sales are likely to rise 5 percent during the coming year, a prediction which may tumble in the face of rising gas prices.
By Peter Miller

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Freddie Mac is out with its April economic forecast and after reading the highlights you have to figure these folks don’t get out much. If they did they might have noticed the soaring price of gas.

The company says there are now signs of “a pick up in home sales beginning this spring driven by the recent encouraging employment reports, low mortgage rates and continued high home buyer affordability.”

One would expect home sales to pick up in spring, given that winter tends to be filled with blizzards and such. The job reports show less unemployment in terms of percentages, but 13.5 million people officially are out of work–a figure which does not count the 2.4 million people were “marginally attached” to the labor force and millions more who are afraid to look for better work or to ask for higher wages.

Oh, and yes, it’s true that mortgage rates continue to hover around 5 percent and low rates should mean increased affordability. However, low rates are not enough, there also have to be reasonable underwriting standards and there have been many complaints that loan applications are getting tougher.

Affordability also relates to the matter of prices and the news on that front is hardly good. As of January, says the home prices nationwide are 16.5 percent below their April 2007 peak and roughly where they were as of May 2004.

Gas prices factor in

While all of this stuff is interesting to discuss, a huge issue remains unmentioned: Freddie Mac’s April Economic Outlook somehow does not reflect on rising gas prices and their impact. The terms “gas” and “gasoline” are nowhere to be found.

Gas prices are central to the U.S. economy. If prices go up households have fewer dollars to spend on other consumer purchases. That’s a problem because about 71 percent of our economy emanates from the money we individually spend.

Equally bad, the price of many goods, commodities and services rise because shipping costs increase with gas price hikes. Also, employers may not be able to hire additional help and that is hardly good news.

Does this impact mortgage quotes? If gas prices stay high enough the answer is, you betcha.

If prices rise generally then lenders will want higher rates of interest to preserve the buying power of their money.

Frequently Asked Questions

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.

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.