Will mortgage rates fall this year? Data from Wednesday’s inflation news

Main agreement

  • Inflation is one of the biggest drivers of mortgage rates, and Wednesday’s new inflation data is a small step in the right direction for those expecting lower home loan rates.
  • Wednesday’s Consumer Price Index (CPI) showed May inflation eased to 3.3% year-on-year, from 3.4% in April. The monthly reading also fell with May prices flat vs. April growth of 0.3%.
  • Both readings were pleasant surprises for economists who had forecast a May increase of 0.1% and an unchanged annual rate of 3.4%.
  • The Fed aims to push inflation further to its 2% target. If successful, mortgage rates are likely to fall along with inflation.
  • Wednesday’s inflation report has already weighed on 30-year rates, with the midday average down 9 basis points by press time and 16 basis points by 5:00 PM Eastern.

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What the latest Inflation Report shows

Wednesday was Fed Day, with the Federal Reserve announcing another hold on its federal funds rate. While it is widely thought that central bank moves affect mortgage rates, the truth is that inflation is a much bigger driver of the rates that mortgage lenders offer. And Wednesday was also a big news day for inflation.

The May consumer price index (CPI) was released on Wednesday. Each month, the CPI shows how much prices have risen since the previous month and how much inflationary pressure we’ve seen over the past year. For those expecting lower mortgage rates, the news was a bit positive.

The latest CPI reading shows that May prices were stable compared to April. This is an improvement over April’s 0.3% increase. The CPI also shows that year-on-year inflation has decreased slightly. Compared to an annual rate of 3.4% in April, the May rate decreased to 3.3%.

These readings were pleasant surprises for economists, who had forecast a May increase of 0.1% and an unchanged annual rate of 3.4%.

The impact of inflation on mortgage rates

The mortgage loan market is affected by a complex mix of many economic factors. These include inflation, consumer demand, housing supply, the strength of the current economy and the status of the bond market, particularly 10-year Treasury yields.

While any drop in inflation is good news for homebuyers and other consumer borrowers, it’s important to note that inflation rates are still elevated. When inflation hit a 40-year high of 9.1% in June 2022, the Federal Reserve went into overdrive, working to tame inflation with an aggressive rate hike campaign 20222023. Eleven hikes in the federal funds rate pushed the key rate to its highest level since 2000, and the central bank has held it since July.

By dramatically raising the federal funds rate, the Fed managed to lower the inflation rate to 3.0% by the June 2023 reading (which came out in July). But if you look at the chart below, you can see that instead of continuing a downward trajectory toward the Fed’s 2% target, inflation rose for a period. And since then, it has hovered stubbornly above 3%.

It’s easy to see the impact of inflation on mortgage rates over the past year. First, when inflation readings released in September and October came in at 3.7%, well above the 3.0% reading seen just two months earlier, 30-year mortgage rates responded, rising to their highest level yet. high in over 20 years.

Mortgage rates were cut later in February as inflation fell to 3.1%. However, when the March inflation report was released in April, it showed a jump of 0.3 percentage points compared to the previous month. The news sent 30-year mortgage rates up about a quarter of a percentage point in a single day.

Wednesday’s inflation report was welcome news for those hoping mortgage rates will come down in 2024. However, the immediate impact may not be too dramatic, as the drop in inflation from April to May was small.

Still, it’s news worth cheering about, especially when you consider the impact on mortgage rates it could have if May’s CPI reading were higher than last month.

Midday mortgage rate movement

At the time of this article’s publication on Wednesday, mid-day credit rate action showed the 30-year average had fallen 9 basis points. An update at 5 pm Eastern showed a decline of 16 basis points to an average of 6.83%.

What 2024 Fed decisions could mean for homebuyers

As widely expected, the Federal Reserve announced that it is keeping the federal funds rate at its current level. Although Wednesday’s inflation reading is hoped to be a sign of a continued downward trend, the Fed has made it clear that it needs to see evidence that inflation is stable and in a sustainable manner landing before it’s ready to start cutting fares.

Currently, the Fed is expected to hold its key rate steady for another meeting in July. However, according to the CME Group’s FedWatch Tool, fed funds traders currently expect the Fed’s first rate cut to be announced in September. 18 meeting. That would give the raised federal funds rate another three months to put downward pressure on inflation. If inflation eases as the Fed hopes, mortgage rates could also see a decline in 2024.

How we track mortgage rates

The national and state averages quoted above are provided as-is via the Zillow Mortgage API, assuming a loan-to-value (LTV) ratio of 80% (ie, a down payment of at least 20%) and an applicant credit score in range 680739. The resulting rates are representative of what customers should expect to see when they get actual quotes from lenders based on their qualifications, which may differ from advertised rates. Zillow, Inc., 2024. Use subject to Zillow’s Terms of Use.

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