Inflation Rises for the Third Straight Month in Troubling Sign for Mortgage Rates
Getty/Johner Images
Annual inflation has risen again for the third straight month, in a troubling sign for mortgage rates that are already creeping close to 7%.
Overall prices rose 2.9% in December 2024 from a year earlier, higher than the 2.7% pace recorded in November, according to the Labor Department’s consumer price index (CPI) data released Wednesday.
In addition to hitting consumers in the pocketbook directly, rising inflation is bad news for mortgage borrowers, since the Federal Reserve’s primary tool to fight inflation is higher policy rates.
Mortgage rates are already near 7%, after rising almost a full percentage point since the Federal Reserve began its “pivot” to lower benchmark rates in September.
Although the Fed has cut its policy rate three times since then, a steady stream of economic data showing solid job growth and higher inflation has reduced investor expectations for how fast and how far the central bank will ultimately reduce rates, impacting the bond markets that ultimately determine mortgage rates.
“Already, the Fed is widely expected to hold off on rate cuts in early 2025. But the latest CPI will influence expectations for the year ahead and help to answer questions about how soon another rate cut may be appropriate, which will influence the current level of longer-term rates, such as mortgage rates,” says Realtor.com® Chief Economist Danielle Hale. “Right now, the market does not place high odds on a cut before June.”
The weekly average for 30-year fixed mortgages stood at 6.93% last week, according to Freddie Mac, and is likely to rise again when the new average is released tomorrow.
In addition to the latest inflation data, last week’s jobs report showed stronger than expected employment growth of 256,000 in December, driving bond yields higher.
Housing inflation slows, but remains major driver of overall price increases
Annual inflation for housing costs remained high at 4.6% last month, although that was the lowest year-over-year increase for shelter prices since January 2022.
Excluding housing costs, annual inflation would have been just 1.9% last month, below the Fed’s flexible 2% target rate.
Shelter prices are reported in the consumer price index with a significant lag and usually don’t accurately reflect the month-to-month changes in actual costs for homeowners and renters.
Costs for homeowners are reported as “owners’ equivalent rent,” which is essentially a measure of how much a homeowner could expect to pay if they were renting their primary residence.
According to the index, owners’ equivalent rent rose 4.8% in December from a year earlier, while traditional rent rose 4.3% on an annual basis. Both measures gained 0.3% from November.
Utilities prices continued to rise, with electricity up 2.8% from a year ago, and natural gas service rising 4.9% annually. Insurance costs for homeowners and renters were up 1.7% on the year.
Warning signs for housing market
The latest inflation data is unwelcome news for a housing market that has just seen two consecutive years of the slowest home sales since 1995.
“Today’s news suggests that housing market activity could be slower than expected in the first part of the year. Higher inflation is going to mean mortgage rates remain elevated,” says Bright MLS Chief Economist Lisa Sturtevant.
Although the latest annual inflation rate was 2.9%, the compounding effects of inflation continue to mount, with overall prices now up 20% from five years ago, she adds. On top of that, higher mortgage rates mean larger monthly payments for new homebuyers, adding to monthly costs.
“Prospective homebuyers are facing these twin financial challenges, which means they will have to adjust their expectations. Some are going to sit out the market altogether,” says Sturtevant.
Rising inflation also means higher costs for homebuilders, in the form of higher labor and material costs and higher borrowing costs due to rising interest rates.
“For now, while many consumers continue to view homeownership as an integral part of the American dream, a sizable majority also believe that right now is not a good time to buy a home,” says Hale. “Existing home sales improved in recent months following fall’s lower mortgage rates, but as rates have climbed back up, our expectations for home sales have been diminished.”
Categories
Recent Posts
"My job is to find and attract mastery-based agents to the office, protect the culture, and make sure everyone is happy! "