Oil's Well That Ends Well?

Oil's Well That Ends Well?

You know oil prices are low when you do a double take gas station signs at every intersection. The same holds true when half the social media posts you see contain snapshots of what your friends across the nation are paying per gallon!

As we closed out 2014, US consumers did indeed benefit from lower prices at the pump and this provided a welcomed backdrop for holiday travel and discretionary spending. But now, in light of this trend, will it also be important to factor lower oil prices into our interest rate predictions and forecasts for 2015? Most of us are aware that two factors; employment numbers and inflation readings, are likely to have greatest influence on the Federal Reserve’s timing on any interest rate hikes. Though most economists agree that there is no direct correlation between interest rates and oil prices, virtually all would admit now that lower oil prices might well color the inflation and employment data themselves in the months to come. How do we best put this in perspective when we contemplate the timing of a home purchase or refinance?

Oil and inflation. With oil prices down and inflation already exceptionally benign, some may be wondering how the Fed would justify an increase in interest rates, were it to happen. We have two pieces of evidence that might play into their logic. First, Fed Chair Janet Yellen stated in a December news conference that she believes oil’s move lower is "transitory." The Fed then expects oil prices to rise to more normal levels before they confront their decision, which many feel will be in mid- to late-2015. Second, the Fed may be looking more closely at the personal consumption expenditure (PCE) index than the better known consumer price index (CPI). Core PCE, excluding food and fuel, is expected to be up nearly 2%, and in line with Fed targets, in year-over-year estimates from June 2014 to June 2015. So, to summarize, the Fed thinks less about oil’s potential impact on reducing inflation and more about how an improving jobs environment will force employers to offer higher wages, which will in turn put upward price pressure on most goods and services. This brings us to our next point.

Oil and jobs. The Fed firmly believes the employment picture is brightening and if the trend of the last few months holds, few will debate they have a foundation to support their "maximum employment" mandate for setting monetary policy, even if that might include hiking rates. Any increase is expected to be gradual at first, but oil prices can play into this in a number of ways. Those in states like Texas, where oil production employs many people, would likely see layoffs if oil prices remained low. And those in states where burgeoning industries such as renewable and alternative energy have brought welcomed increases in jobs and technology could see a pullback in spending and employment should cheaper oil persist. Old habits die hard, and fossil fuels have certainly been one of toughest for the US to kick.

With no pun intended, what all of this oil speculation really highlights is the reality that any number of complex factors can reenter the mix and change the course of interest rate direction --- no matter how late in the game. As we begin 2015, we must look back at how far we’ve come over the last five years, and while interest rates have been at their historic lows and the Fed funds rate has been at near-zero levels. Nobody expected rates to stay this low this long, but they have, and the housing market has made great strides in its recovery as a result. Might the first quarter of 2015 be the last opportunity to take advantage of that on the purchase or refinance side? And let’s not forget home values themselves --- and how much better most fare than just five years ago. The median home price in California as of November, 2008, was $288,000. That same home today would have a statistical value of $445,000, reinforcing the long term trend we know all too well --- real estate has proven to be a great investment over time.

So with a full tank of gas, we begin down the road of the New Year. While we don’t yet know the final destination, we can appreciate that we still have a great opportunity before us with mortgage programs and pricing. Call me today if I can help you with your journey.

Happy Motoring,

Rob Spinosa
Mortgage Loan Originator
NMLS: 22343 CalBRE: 01297944
Cell: 415-367-5959 Fax: 415-366-1590
rspinosa@rpm-mtg.com www.rpm-mtg.com/rspinosa 
1058 Redwood Highway, Frontage Road, Mill Valley, CA 94941

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