Did Osama bin Laden influence mortgage rates or home prices?by Peter Miller
The instant reaction to the death of Osama bin Laden was as it should be: oil prices dropped, stock futures rose and decent people celebrated. But these were temporary blips on the economic scene, events which will quickly fade in terms of financial impact.
Does bin Laden’s death affect mortgage rates?
If the question is whether bin Laden had any material impact on mortgage rates or U.S. home prices, the answer is plainly no.
However, the same cannot be said for another radical player on the international scene, Libya’s Colonel Muammar Gaddafi.
Oil has been much more influential
As this is written, Brent crude oil is topping $121 per barrel. There are 42 gallons to a barrel, but after refining, only about a third becomes gasoline while the rest is made into jet fuel, diesel, etc. Even if the whole barrel could be converted into gasoline, the cost per gallon would be $2.88 before shipping, storing, retailing and taxes.
However, it used to be that cheap gas was a given–about $3 per barrel in cash terms. This was the case until 1970 when the Libyans–under Gaddafi’s revolutionary government–demanded a 20 percent increase in drilling royalties, and got it by threatening to nationalize foreign oil firms. The importance of this event was the shift in leverage from Western oil companies to oil-producing nations.
If royalties could be forced up 20 percent, why not 40 percent, or even more?
Since oil prices were and are denominated in dollars, as the value of the dollar declines, the price of oil in terms of buying power falls. In a sense, the Libyans were trying to recapture lost buying power in the same way that lenders want higher interest levels when inflation hits.
Yet if some sort of economic parity for oil producers was the original goal, that goal has long since been overshadowed. Today, the U.S. is not energy independent and the result is that we pay monopolist oil prices.
Does this impact mortgage rates and home prices?
The answer is yes, and for several reasons:
- Higher energy costs mean more money must be spent to heat and cool homes, money that otherwise could go to better things, such as paying off the mortgage, credit card debt or auto loans.
- The high price of oil helps inflate the dollar. This means that a gallon of milk costs more, not because a gallon is bigger but because the dollar buys less. In a similar sense, part of the reason for rising home prices is that we value homes in terms of dollars, and a home that used to cost $100,000 two decades ago, now costs far more if we only measure home values in dollar terms.
- High energy costs devalue the dollar and contribute substantially to our balance-of-payments problem. That raises inflationary concerns.
- Inflation makes mortgage lenders and investors nervous. Mention the term “inflation” and they either want higher mortgage rates for fixed-rate loans or they want to encourage borrowers to get ARM financing through the use of teaser rates and more liberal qualification standards.
So no, bin Laden did not have a noticeable impact on mortgage rates or U.S. home prices. However, the same cannot be said for other players in the Middle East.