Falling Inflation in April Paves Way For Possible Mortgage Rate Reduction

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The latest Consumer Price Index (CPI) report revealed a slight decline in inflation for April, bringing a potential reprieve for the housing market struggling under high borrowing costs.

According to the Bureau of Labor Statistics, the annual inflation rate eased to 3.4% in April, down from 3.5% in March. The marginal decrease could affect mortgage rates, which have surged to their highest levels in over two decades.

As the Federal Reserve continues its efforts to curb inflation, the latest data could influence their decisions on interest rates, potentially easing the financial burden on prospective homebuyers.

What's Important: The Fed has maintained elevated interest rates as inflation has remained stubbornly above its 2% target. Elevated rates have made the cost of loans for homes expensive, depressing the ability of many Americans to buy property. 

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Since March 2022, the Fed’s rate hikes aimed to slow inflation, which had soared to 40-year highs. That rise in rates — which increased borrowing costs — has contributed to a jump in mortgage rates and has discouraged buyers from entering the housing market.

While the CPI data is backward-looking, on Wednesday, the Mortgage Bankers Association (MBA) reported that mortgage applications increased by 0.5% for the week ending May 10.

However, mortgage applications may increase in the coming weeks as the decelerating inflation data issued Wednesday was met with a drop in the 10-year Treasury yield, which serves as an indicator for the direction of mortgage rates. 


Why It Matters: The decline in Treasury yields suggests that mortgage rates could follow suit and decrease as well. The April inflation reading could indicate that prices are moving back toward the Fed’s 2% target, potentially leading to lower mortgage rates in the future.

The Fed will hold its next meeting in June, where policymakers will assess the progress on inflation and consider the possibility of lowering interest rates. Fed Chair Jerome Powell recently expressed diminished confidence in the trajectory of inflation aligning with the Fed’s target, indicating a potential shift in the central bank’s stance.

The April CPI reading will be important in shaping their decisions; if inflation continues to cool, there is speculation that the Fed might cut rates this year, which could help lower borrowing costs for mortgages.

At the same time, housing costs themselves continue to be a major contributor to the monthly increase in inflation as shelter is a significant component of the CPI. In April, the shelter category, which includes housing costs, rose by 0.4% from the previous month and 5.5% year-over-year.

That category, along with gasoline, accounted for more than 70% of the monthly all-items increase in April.

As the Fed continues to monitor inflation and consider future rate cuts, any reduction in borrowing costs could provide much-needed relief to the housing market and improve affordability for many Americans.

Rate Trends: According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 7.08% from 7.18%, with points decreasing to 0.63 from 0.65 for 80% loan-to-value ratio loans. The effective rate also decreased from last week.

As mortgage rates potentially decrease, the housing market may see a boost in activity, with more prospective buyers entering the market and existing homeowners considering refinancing options. 

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