The Price of Oil, Interest Rates and Real Estate

With all the attention focused recently on rising interest rates, we still have recognized the fact that rates remain near historic lows. On the other hand, as rates have risen and the stock market has climbed, oil prices have headed above $100 per barrel once again. Yet, there seems to be very little concern or news regarding this latest spike. In the past, the rising price of all set off alarms as analysts expected higher oil prices to lead to a slower economy because consumers will be spending more of their budgets on the cost of energy. Of course, a slower economy can lead to lower interest rates. What is really interesting is the fact that this summer higher oil prices have not lead to significantly higher gasoline costs. Why is that? While it makes sense that oil prices will directly affect the price of gas, one should remember that a variety of other factors will affect the price of gasoline.

These factors include the amount of taxes levied upon gasoline, the amount of local refinery capacity, the cost of shipping and also the availability of potential alternatives to gasoline. For example, U.S. oil and natural gas reserves are increasing dramatically because of new technologies such as shale oil production. Regardless of what the politicians will tell you, while this increased production may help make the U.S. energy independent, it will not necessarily affect the price of oil world-wide. However, because the oil is extracted locally, it has the potential to reduce the price of producing gasoline. This does not mean that gas prices will fall precipitously while oil prices rise. Eventually, the relationship will be reestablished. With regard to interest rates and real estate, the price of gasoline does affect trends in the real estate sector. As a matter of fact, a major real estate trend has been influenced by these prices. We will present more on this trend in an upcoming issue.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com