The Downside is the Upside: The Weekly Market Update

Rates and Oil
Rates and Oil

Rates and Oil

The stock market is setting records. We have a new tax plan which lowers taxes significantly for companies and moderately for individuals. We just had a decent retail holiday season with higher home sales closing out the year. In other words--everything is looking up for the economy. Most economists are cautiously optimistic that the good times will continue through at least 2018.

Unfortunately, with the economy gaining momentum, some of the movements upwards are actually turning out to be downers. More specifically, we are referring to interest rates and oil prices. The price of oil is now over $60 per barrel after oscillating above and below the $50 level for more than a year. Certainly, higher oil prices is the price we have to pay for having a better economy that increases oil demand. However, oil prices could still fall if the news on the supply side becomes more optimistic. There have been plenty of forecasts showing at least the potential of this occurring.

Not so with interest rates. You can't pump money out of the ground. The better economy has caused the Federal Reserve Board to raise short-term interest rates five times over the past two years. Long-term rates have also been trending upward as the economy has improved. Most are not expecting another increase by the Fed when they meet at the end of this month. But that does not mean that long-term rates won't keep rising if we get the news that the economy is still rolling. As a matter of fact, the threat of higher interest rates is one reason that real estate is so hot. Most want to purchase before rates go up further. Will rates keep moving up? That depends upon whether the economy stays strong in 2018.

The Weekly Market Update

Rates on home loans continued to follow long-term rates higher. For the week ending January 18, Freddie Mac announced that 30-year fixed rates increased to 4.04% from 3.99% the week before. The average for 15-year loans rose to 3.49% and the average for five-year adjustables was unchanged at 3.46%. A year ago, 30-year fixed rates averaged 4.09%, slightly higher than today's level.

Attributed to Sean Becketti, chief economist, Freddie Mac -- "Some may be wondering if this is the last time we'll see a three handle on 30-year fixed rates. Never say never, but inflation is firming, and the Federal Reserve's Beige Book indicates broad-based economic growth and labor markets are tightening. This means upward pressure on long-term rates, like the 30-year fixed-rate, is building."

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.