Positive Inflation Report Caused The Feds To Hit The Brakes On Rate Hikes

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According to the Mortgage Bankers Association This Week in Real Estate mortgage demand surged as interest rates retreated for the second consecutive week, following the Federal Reserve’s decision on Wednesday to not raise its key interest rate. Influencing the decision to not raise the benchmark interest rate for the 11th time was the 11th consecutive month of deceleration in consumer prices. May’s Consumer Price Index (CPI) saw the smallest year-over-year gain since March 2021. Total mortgage application volume rose 7.2% compared to the previous week, as purchase and refinance applications increased 8% and 6%, respectively. Below are a few newsworthy events from the second week of June that influence our business: 

What Fed’s Pause on Rate Hikes Means for Home Buyers. Ending a cycle of 10 consecutive rate hikes, the Federal Reserve voted this week to hold off on another increase to its key short-term interest rate. The news fueled hopes that borrowing costs for home buyers could cool in the coming weeks, but only if the Fed continues to pause rate hikes. Mortgage rates are not directly tied to the Fed’s benchmark rate but are often influenced by it. However, the Fed on Wednesday signaled that two more increases to its benchmark rate are likely this year as it continues to manage the inflation rate. National Association of REALTORS Chief Economist Lawrence Yun says further Fed hikes are unwarranted; in fact, the Fed may need to start lowering its rate soon. “A monetary policy lag time exists between decision and inflation,” Yun says. “The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4%. There is no need to consider raising interest rates. In fact, considering the balance sheet difficulties faced by community banks and the weakness in the commercial real estate sector, the Fed should look at cutting interest rates before the end of the year. The Fed should look forward, not backward.” Mortgage rates are more closely tied to the 10-year Treasury bond, which responded this week to better inflation news with a rate decline to 3.7%. “That normally means the 30-year mortgage rate is around 5.5% to 5.7%,” Yun says. “Of course, we know mortgage rates have been near 7% recently, but the potential for a decline is real as we progress through the year.” The Fed’s latest decision to hold off on a rate increase in June “will ensure that mortgage rates are likely to keep moving sideways for the next couple of months,” says George Ratiu, chief economist at Keeping Current Matters. Read the full story here.

Mortgage Rates Drop Following Positive Economic Indicators: Freddie Mac. Mortgage rates dropped a second week in a row following a positive inflation report showing prices continue to moderate and the Federal Reserve’s decision to pause on interest rate hikes, according to Freddie Mac. “Mortgage rates decreased slightly this week in anticipation of the pause in rate hikes by the Federal Reserve,” Freddie Mac Chief Economist Sam Khater said. “As inflation continues to decelerate, economic growth is slowing, and the tightening cycle of monetary policy is reaching its apex, which means mortgage rates are expected to decrease later this year and into next.” Despite the dip, mortgage rates remained in the 6% to 7% range and are not expected to drop significantly this year, according to Realtor.com economic data analyst Hannah Jones. “Though slowing inflation signifies better economic conditions ahead, borrowing, including for a home purchase, is likely to remain expensive for the remainder of the year,” Jones said in a statement. “Incoming economic data will reveal whether enough has been done to bring inflation back down to the 2% target. “The psychological shock from last year seems to be dissipating, and buyers are running the math to calculate their revised purchasing budgets as they look for a home,” George Ratiu, Keeping Current Matters Chief Economist, said in a statement. “The mood has been mirrored by rising foot traffic at open houses, which registered higher volume in the last months compared to the pre-pandemic period of 2017-19. Read the full story here.

Inflation Slows to Lowest Level Since March 2021. Consumer prices in May saw the smallest year-over-year gain since March 2021. This marked the eleventh consecutive month of deceleration. While this measure aligned with expectations, core inflation remained persistent due to the increase in rent prices. The shelter index (housing inflation) continued to be the largest contributor to both headline and core inflation, accounting for over 60% of the increase in all items excluding food and energy. The Fed’s ability to address rising housing costs is limited as shelter cost increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing the cost of AD&C financing. The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.1% in May on a seasonally adjusted basis, following an increase of 0.4% in April. The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.6% in May, following an increase of 0.4% in April. During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 4.0% in May, following a 4.9% increase in April. Read the full story here.

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