Persistently high inflation is clouding the mortgage rate outlook. Could rate relief in 2026 now be off the table entirely?
Another uptick in the US’s annual inflation rate comes as little surprise as the US-Iran war rumbles on, but it’s still deepened uncertainty across the US housing market and clouded the interest rate outlook – and even raised the prospect of rate hikes in the months ahead.
New data released Tuesday by the Bureau of Labor Statistics showed the consumer price index (CPI) jumping to 3.8% in April, marking its highest level for nearly three years and sparking an increase in 10-year Treasury yields, which strongly influence mortgage rates.
With homebuying activity already sluggish, the latest reading doesn’t exactly threaten to derail the spring market. But it could still add another layer of pressure for mortgage professionals and market watchers, according to Fairview Commercial Lending’s Glen Weinberg, who sees nothing good coming out of the inflation news where housing is concerned.
“I’m on the fence if it will actually worsen too much as already the market is pretty anemic with sales volumes,” he told Mortgage Professional America, “but I can say with 100% certainty that the inflation reading will not help the market in any way.”
The outbreak of the Iran conflict has sent mortgage rates higher since the end of February, strengthening fears of a creep back towards 7% even after they slipped slightly in the middle of April.
Freddie Mac’s Primary Mortgage Market Survey showed the 30-year fixed-rate benchmark sitting at 6.37% for the week ending May 7, a second consecutive weekly increase, while the average 15-year-fixed-rate mortgage also inched upwards.
‘A new scenario has been introduced’
Some prominent mortgage professionals still see rates moving lower before the end of the year, especially if the Federal Reserve – which doesn’t set mortgage rates but can influence them through its own rate decisions – introduces cuts under its next chair, presumably Kevin Warsh.
Not so fast, Weinberg said: he sees the latest inflation increase as an ominous sign for those expecting Fed cuts.
In fact, if price growth continues in the months ahead, Weinberg said the central bank could be left with no option but to move rates in the opposite direction.
“Based on the recent readings, I think any rate cuts are off the table likely through year end and a new scenario has been introduced which is a possible increase,” he said. “Best case [is] the Federal Reserve sits tight, but rate increases are now a real possibility.”
Oxford Economics’ chief US economist Michael Pearce still sees the Fed cutting rates this year, but said the latest inflation data has probably pushed back that move by about half a year.
“A firmer economy and stickier inflation will keep the Federal Reserve on a prolonged hold – we now expect the next rate cut in December, rather than June,’ he said.
“The Iran war still presents downside risks to the near-term outlook via higher energy prices, the impact on the stock market, and supply chain risks. AI has yet to have a significant impact on the labor market, but there are signs of more hiring and firing in sectors at the leading edge of AI adoption.”
Rates could be on the rise again
Upward pressure on bond yields because of inflation expectations, Weinberg suggested, could persist – and he sees a risk of mortgage rates rising by as much as 50 basis points in the event of prolonged price shocks.
That would likely be a meaningful affordability hit for potential buyers, potentially adding hundreds of dollars to monthly mortgage payments and pricing marginal buyers out of the market entirely.
Those bond yields can fluctuate dramatically from one week to the next, and positive news on the Iran war might send them lower. But for now, Weinberg said the signs are not good for mortgage rates.
“Looking at the 10-year Treasury, the market is factoring in higher inflation for longer,” he said, “which will spell bad news for many.”
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