Mortgage Rates are Down but Inflation is Beginning to Roar – So What’s Going On?
As I’m writing this article, analysts are fretting over the latest inflation reports. But paradoxically, mortgage rates continue to decline, tempting prospective homebuyers to enter the market.
The 30-year fixed-mortgage rate was 2.94% for the week ending May 13, a drop of two basis points from the prior week. Since the end of March, the rates have been falling and have remained under 3% for over a month. The 15-year fixed-rate fell an impressive four basis points to an average of 2.26%.
Interestingly, “The last time inflation surged as much as it has now in one month, Freddie Mac’s mortgage rate [skyrocketed] to 16.9%” according to Danielle Hale, chief economist at Realtor.com.
For those looking to buy a home, the low mortgage rates are an offset to rising home prices which is occurring throughout the country due to low supply and inflation.
Most analysts are confused about the fact that mortgage rates are falling while everything else is experiencing price increases. Historically, inflation brings higher mortgage rates, but not this time – at least not yet. For example, the price of consumer goods hit their highest level in 13 years in April according to the U.S. Consumer Price Index. A separate report showed a commensurate rise in wholesale prices.
But according to Hale, “While I don’t expect double-digit mortgage rates any time soon, I do expect mortgage rates to follow treasury yields as the combination of abundant supply and concerns about inflation, mean that investors expect higher returns.” Basically, Hale is saying that mortgage rates should be rising in the near term.
While the Federal Reserve has stated its opinion that inflation will be “transitory” and that prices will return to normal in short order, many analysts are skeptical of this view.
Most observers believe that if April’s inflation readings continue for an extended time, the Fed will be forced to raise interest rates, and this will certainly put pressure on mortgage rates to rise – maybe dramatically.
As a matter of fact, Sam Khatar, Freddie Mac’s chief economist issued a warning about possible mortgage rate increases in the short term. Khatar said, “The low mortgage rate environment has been a boon to the housing market but may not last long as consumer inflation has accelerated at its fastest pace in more than 12 years and may lead to higher mortgage rates in the summer.”
In closing, I think that this is a rare opportunity for homebuyers and investors to take advantage of this extraordinary low-rate environment. Real estate has always been the best hedge against inflation. As we approach the summer, this opportunity may evaporate.
For those who have questions, I’m always available to answer them, at no charge, of course.