Inflation Hike May Put Mortgage Rates Above 7% Again

Consumer prices accelerated faster than expected in March, which could mean higher home financing costs this spring, says NAR Chief Economist Lawrence Yun.

The latest inflation data could push mortgage rates higher, economists are saying. Consumer prices reaccelerated in March, showing a more somber picture of economic progress and throwing into question the Federal Reserve’s planned rate cuts this year. Housing analysts had been hoping that such cuts could help bring mortgage rates lower.

“March inflation figures were very bad, which also means bad news for interest rates,” says Lawrence Yun, chief economist at the National Association of REALTORS®.

The consumer price index, considered a key gauge of inflation, rose to 3.5% in March, moving further away from the Fed’s desired 2% target rate. The Fed has maintained that it will not start cutting its short-term benchmark interest rate until the CPI reaches 2%. Until then, consumer price pressure is likely to keep mortgage rates elevated.

The Fed’s benchmark rate is not directly tied to mortgage rates but often influences them.

“Mortgage rates, unfortunately, will move a notch higher and are likely to cross above 7% in the upcoming weeks,” Yun says. “In addition, the gigantic federal budget deficit will soak up more borrowing, thereby leaving less for mortgage borrowing.”

Yun notes that the latest measure of “shelter” inflation, which has been climbing monthly, is 5.7% higher than a year ago. This increase, along with rising energy costs, has largely been blamed for elevated inflation overall.

However, “the unofficial data from the apartment industry indicates falling rent due to overconstruction,” Yun says. “If rent data calms, then overall inflation will automatically be lower. It is, therefore, possible to get to the 2% inflation target by year’s end, even with bumps and delays.”

Meanwhile, many prospective home buyers and home sellers may hold out for lower mortgage rates before they dip into the housing market.

“It’s easy to see, if interest rates are increased by even 25 basis points, the negative chain reaction that would have on both the residential and commercial real estate markets,” says Greg Clement, CEO of Realeflow, a data and real estate investing software firm. “Buyers and borrowers are tapped out and frustrated with the lack of inventory and lack of borrowing or refinancing options. We’re staring down into the abyss if we cannot soon find a balance between interest rates and inflation.”