Will Mortgage Rates Fall This Year? Clues From Today’s Inflation News
Key Takeaways
- Inflation is one of the biggest drivers for mortgage rates, and today’s fresh inflation data is a small step in the right direction for those waiting on lower home loan rates.
- This morning’s Consumer Price Index (CPI) shows that the May inflation rate ticked down to 3.3% year over year, a slight improvement over April’s 3.4% reading.
- The monthly reading was also positive, with May prices flat vs. April’s 0.3% uptick.
- Both readings were pleasant surprises to economists who predicted a May increase of 0.1% and an unchanged yearly rate of 3.4%.
- The Fed aims to push inflation further down to its 2% target. If it succeeds, mortgage rates are likely to decline along with inflation.
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What Today’s Inflation Report Shows
Today is Fed Day, with the Federal Reserve announcing another hold this afternoon for its benchmark federal funds rate. While it’s widely thought that the central bank’s moves impact mortgage rates, the truth is that inflation is a much bigger driver of the rates mortgage lenders offer. And today also happens to be a big inflation news day.
The May Consumer Price Index (CPI) was released this morning. Every month, the CPI shows how much prices have increased since the previous month and how much inflation pressure we’ve seen across the previous year. For those waiting on lower mortgage rates, the news was mildly positive.
The latest CPI reading shows that May prices were flat compared to April. That’s an improvement compared to April’s 0.3% uptick. The CPI also shows that year-over-year inflation has dipped slightly. Compared to a yearly rate of 3.4% in April, the May rate has inched down to 3.3%.
These readings were pleasant surprises for economists, who predicted a May increase of 0.1% and an unchanged yearly rate of 3.4%.
The Impact of Inflation on Mortgage Rates
The mortgage lending market is affected by a complex mix of many economic factors. These include inflation, consumer demand, housing supply, the current economy’s strength, and the bond market’s status, especially 10-year Treasury yields.
While any downturn in inflation is good news for home buyers 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 2022–2023 rate-hike campaign. Eleven increases to the federal funds rate pushed the benchmark rate to its highest level since 2000, and the central bank has held it there since July.
By dramatically raising the federal funds rate, the Fed succeeded in lowering the inflation rate to 3.0% by the June 2023 reading (which came out in July). But if you look at the graph below, you can see that instead of continuing a downward trajectory towards the Fed’s 2% target, inflation increased for a period. And since then, it has stubbornly wavered above 3%.
It is easy to see inflation’s impact 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 prior—30-year mortgage rates responded, surging to their highest level in over 20 years.
Mortgage rates later sank in February after inflation dipped to 3.1%. However, when the March inflation report was released in April, it showed a jump of 0.3 percentage points over the previous month. That news caused 30-year mortgage rates to shoot up about a quarter percentage point in a single day.
Today’s inflation report was welcome news for those hoping mortgage rates will come down in 2024. However, the immediate impact isn’t likely to be too dramatic, since the inflation dip from April to May was minor.
Still, it’s news worth cheering, especially when considering what the impact on mortgage rates could have been had the May CPI reading come in higher than last month.
Mid-Day Mortgage Rate Movement
Today’s mortgage rate average won’t be known until the day ends. But at the time of this writing, mid-day rate movement shows the 30-year average has declined 9 basis points, from 6.99% this morning to now 6.90%.
What 2024 Fed Decisions Could Mean for Home Buyers
As was overwhelmingly expected, the Federal Reserve announced this afternoon that it’s holding the federal funds rate at its current level. Though today’s inflation reading is hopefully a sign of a continued downward trend, the Fed has made it clear that it needs to see evidence inflation is firmly and sustainably coming down before it’s ready to start cutting rates.
At present, it’s expected the Fed will hold its benchmark rate steady for one more meeting in July. However, according to the CME Group’s FedWatch Tool, fed funds traders currently predict the first Fed rate cut will be announced at the Sept. 18 meeting. That would give the elevated federal funds rate three more months to put downward pressure on inflation. If inflation subsides as the Fed hopes, mortgage rates could see 2024 declines as well.
How We Track Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a loan-to-value (LTV) ratio of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
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