Higher gas prices bring lower mortgage rates

It's hard to predict how the aftermath of Hurricane Katrina will affect mortgage rates and the housing industry. So far, there seems to be a trade-off: Higher prices at the gas pump result in lower mortgage rates.

The benchmark 30-year fixed-rate mortgage fell 6 basis points to 5.80 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.36 discount and origination points. One year ago, the mortgage index was 5.78 percent.

The benchmark 15-year fixed-rate mortgage fell 4 basis points to 5.43 percent. The benchmark 5/1 adjustable-rate mortgage fell 6 basis points to 5.41 percent.

Crude oil prices rose in the past week, partly because of anxiety over the disruption of oil production in the Gulf of Mexico. But crude oil's availability (or lack of) didn't have a lot to do with this week's mortgage-rate drop. The trigger for the rate decrease was gasoline prices, which surpassed $3 a gallon in some markets.

Even if you have a surplus of crude oil, it doesn't do drivers any good if the refineries can't extract gasoline and deliver it to where it's needed. Katrina shut down at least half a dozen refineries, four of which produce gasoline. No one knows when they will resume production. The decreased supply drove gasoline prices up.

"If you take six refineries offline, the serious question is how long it takes to get them back online," says Doug Duncan, chief economist for the Mortgage Bankers Association.

When the scope of the refinery problem became clear on Tuesday, yields on U.S. Treasury notes plummeted to levels last seen seven weeks ago. Mortgage rates tend to move in the same direction as Treasury yields.

The drop in Treasury yields "was a recognition that it was going to, at least in the short run, be a depressing factor for economic growth," Duncan says. "That is, as oil prices grow, that takes away disposable income for consumers and increases costs on the business side, so that may slow economic growth to some degree. My guess is that it's temporary."

As mortgage rates drop, at least temporarily, the costs of renovating and building houses could rise. But such increases won't be across the board and might be felt mostly in the region affected by the hurricane, says Michael Carliner, economist for the National Association of Home Builders.

"The work that'll be done in the foreseeable future will all be patch-up kinds of things," he says. "It's likely to draw labor out of construction and disrupt construction schedules. In terms of materials, it won't affect things like concrete and framing lumber. It might well affect plywood, roofing, maybe windows."

There won't be an immediate surge in the need for concrete and framing lumber because those are mainly construction supplies, not repair supplies, Carliner says. A lot of structures in the hurricane-affected areas will have to be torn down and rebuilt, but that will happen over years, and the effect on prices for materials will be spread out.