As Inflation Cools, Mortgage Interest Rates Are Responding Favorably


The Federal Reserve’s fight to tame inflation over the past year has been the single greatest contributor to mortgage interest rate volatility. The Labor Department released the June Consumer Price Index (CPI) This Week in Real Estate showing inflation realized its smallest gain in more than two years. Consumer prices are rising at the slowest pace since March 2021. As inflation cooled to a monthly pace near the Fed’s inflation target, mortgage interest rates responded favorably, moving more than an eighth of a percentage point lower following Wednesday’s release of the June CPI. Below are a few newsworthy events from the second week of July that influence our business: 

Home Prices Are Hitting New Highs Again, as High Rates Put the Squeeze on Supply. Home prices hit a record high in May, rising 0.7% nationally compared with April at a seasonally adjusted rate, according to the Black Knight Home Price Index. Prices, which have been rising since January, were 0.1% higher in May than a year earlier. The sharp jump in mortgage interest rates last year threw cold water on an overheated housing market, but it didn’t last long. Even with rates still high, home prices are now gaining again, and the gains are accelerating with each new month. “There is no doubt that the housing market has reignited from a home price perspective,” said Andy Walden, vice president of enterprise research at Black Knight. “Though the backward-looking annual growth rate dipped to 0.1%, May’s exceptionally strong +0.7% month-over-month gain would equate to an annualized growth rate of 8.9%, suggesting the annual home price growth rate would remain at or near 0% for only a short time before inflecting and trending sharply higher in coming months,” Walden added. Read the full story here.

Rates Surge Back Under 7% Following Inflation Data. Mortgage rates had been moving higher fairly rapidly over the past 2 weeks with the average lender easily into the 7% range for a top tier conventional 30yr fixed scenario. It was clear that rates were responding to stronger-than-expected economic data and apprehension that we could see more of the same from subsequent reports. Today brought one of the most important among those subsequent reports: June’s Consumer Price Index (CPI). This is the most influential inflation report on any given month as far as interest rates are concerned and it ended up providing some much-needed relief today. Inflation cooled to a monthly pace that is very close to in-line with the Fed’s inflation target. To whatever extent such a pace can be maintained or improved upon, the Fed wouldn’t need to continue hiking rates and the rest of the bond market wouldn’t need to continue defending against that possibility. In that sense, today marks the first step in a long journey, but one that nonetheless helped rates move more than an eighth of a percentage point lower–once again returning to the high 6% range. Read the full story here.

Yun: Latest Inflation News Bodes Well for Housing. Inflation in June saw its smallest gain in more than two years, which translates to smaller increases in consumer prices. “Low inflation means low mortgage rates,” says Lawrence Yun, chief economist for the National Association of REALTORS. “Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.” The Labor Department’s Consumer Price Index rose last month by only 3% year over year – a rate that’s much lower than the 9% hikes of last summer and the slowest pace since March 2021. “The economy is on a safer path today as victory over inflation is in the air,” says Chris Rupkey, chief economist for FWDBONDS, an economic research company. “Even core inflation is down in the dumps, with a 0.2% rise, which is the softest point since August 2021.” Read the full story here.

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