It may be hard to see how the sharp decline in oil prices will affect the housing market. We can all see that home heating bills will be lower, and it will cost less to make trips to the home-improvement store! But there are relationships between oil, inflation, and interest rates that you may want to pay attention to that can help you instill a sense of urgency in your clients who are thinking of buying or selling anytime soon.
A really basic way oil and the housing market are connected is that when oil and gas prices drop, people have more disposable income, and therefore can spend more on a home purchase. According to housingwire.com, non-oil-producing states may see housing prices rise as the population realizes benefits from lower prices. Manufacturers may be able to increase production inexpensively and hire more workers as well. On the flip side, oil-producing states may see layoffs and a climb in unemployment, which translates to less disposable income and less money to put into a home purchase. Experts do caution that the changes may not take effect immediately.
A more complicated relationship exists between oil and interest rates and the bond market. In general, the bond market and interest rates have an inverse correlation — that is, when one goes down, the other goes up. Bond prices and interest rates are inversely related: as one goes down, the other goes up. However, bond yield — the interest earned — and interest rates move in the same direction: when one goes up, so does the other. So when a Treasury bond has a high yield, overall interest rates are also higher. With more disposable income, investors are looking to the bond market and putting more money there. More investors equates to a lower yield, or return, on the bond investment. So as the yield on bonds is dropping, so is the interest rate on mortgages. It’s a complex relationship but ultimately it can benefit your business as more people look at investing in a new home.
Now, to throw a monkey wrench into that scenario, consider that if oil prices stay low, leading to lower unemployment and possibly wage increases as well, fewer people will buy bonds, yields will increase, and interest rates — including mortgage interest rates — will also increase. Whew!
So are declining oil prices good for the housing market? The answer is … kind of, for now. And how does that affect you? It’s a great way to let clients know that If they’re looking to make a change in their home ownership, whether buying or selling, it’s a good time to make a move while interest rates are low and home prices have not yet risen. Please encourage your clients to contact me today to discuss their personal financial situation and to see how they can benefit from today’s economic situation.