Mortgage rates expected to drop after positive inflation report

Latest CPI shows inflation fell to 5%

Mortgage rates expected to drop after positive inflation report

The latest CPI report, released on Wednesday, shows the inflation rate fell to 5% – its lowest level since May 2021 – which will likely usher in decreases in mortgage rates by this summer. But amid such positive developments came news that the Fed now predicts a mild recession to emerge by year’s end.

In its report, the US Bureau of Labor Statistics reported economic signs as of last month: “In March, the Consumer Price Index for All Urban Consumers increased 0.1% seasonally adjusted, and rose 5.0% over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4% in March [seasonally adjusted], up 5.6% over the year [unadjusted].”

In plain English, this means the rate of inflation continues to decline with prices rising 5% in March year-over-year – down from a peak of around 9% last summer. The Fed has been trying mightily to get the inflation rate down to 2% -- an elusive goal despite the central bank’s nine consecutive hikes to the interest rate in recent months to slow increases in prices. All of this, in turn, could have a significant impact on mortgage rates.

Inflation refuses to go away

Melissa Cohn (pictured right), regional vice president of William Raveis Mortgage, told Mortgage Professional America the Bureau of Labor Statistics is a sign the Fed’s rate increases – nine consecutive hikes over the last few months – are having their desired effect. But she was quick to disabuse the notion that inflation is now fully tamed.

“The print rate on CPI showed that CPI was like .1% and the rate of inflation dropped to 5%, but that the core rate was up four tenths of a percent, which still shows that inflation is still stubborn,” she said. And yet, the economic report bodes well for mortgage rates, she added. “The initial reaction in the markets for the first hour was the markets cheered and the bond yield dropped nicely – I think they were down at one point to 3.36%.”

The price on bonds and mortgage rates have an inverse relationship with one another – when bonds are pricier, mortgage rates are generally lower. It’s true in the reverse as well: When bonds are less expensive, mortgage rates are higher. Cohn said bond yields rose slightly as the implications of the CPI report became clearer.

“And then as people thought about it more and realized the number, while it’s better, is not weak enough to prevent the Fed from raising rates again next month, the market turned and bond yields for a period of time were actually slightly higher – they were up like 3.44% and the market is settling back down to 3.41%,” she said during a telephone interview on Wednesday afternoon.

The upshot: “It’s quite likely the Fed will raise rates by a quarter point in May,” Cohn said. “Maybe it will be the tenth consecutive rate hike in May that will do the trick! Hopefully, the Fed will pause rates starting in June, and there will be no more rates hikes. And if bond yields stay down at this level, then mortgage rates will continue to come down. And lower rates is good news for the real estate market.”

Realtors cheer the likelihood of lower rates

To be sure, those in the real estate industry were buoyed by the news. Like Cohn, the National Association of Realtors (NAR) predicted mortgage rates to dip below 6% given the Bureau of Labor Statistics findings.

“Calmer inflation means lower mortgage rates, eventually,” Lawrence Yun (pictured left), NAR’s chief economist, said in a statement to MPA. “The 5% consumer price inflation in March is a steady improvement from 9% last summer, 8% in autumn, 7% during Christmas, and 6% in the early months of this year. The ideal inflation of 2% is still maybe a year away, but this directional improvement is a clear signal to the Fed to change its tightening monetary policy, especially considering that many regional banks are still on the edge of further interest rate risk blowup.”

While a good omen for mortgage rates, the report’s details on the rental market were not as favorable, Yun suggested. “One important turn in the latest data was the deceleration in the rent component,” he said. “Though still up by a whopping 8.8% from a year ago, the monthly gain was much lighter at 0.45% compared to the 0.7% to 0.9% monthly gain over the past year. It was inevitable for rent growth to soften, considering the robust apartment construction. Mortgage rates slipping down to under 6% looks very likely towards the year’s end.”

Released simultaneously with the CPI were the minutes from the March 21-22 meeting of the Board of Governors of the Federal Reserve System indicating a mild recession in the offing. That temporary decline in trade and industrial activity spurred by two consecutive quarters of negative GDP growth is expected to emerge by year’s end, according to the central bank’s minutes.