Inflation runs hot and forces mortgage rates skyward - Movement Mortgage Blog

Inflation data spooked markets over the last week with the Dow dropping more than 1,200 points following the release of August’s consumer price index (CPI) by the Bureau of Labor Statistics (BLS). The CPI showed a 0.1% month-over-month increase in August despite a drop in gas prices. On an annual basis the CPI rose 8.3%. The Dow’s drastic drop was the index’s worst day since June 2020 and put a damper on investor’s hope of a slightly less hawkish Federal Reserve.

A day later, the BLS released the producer price index (PPI) which showed a second consecutive month of decline with a 0.1% month-over-month decrease and in line with economists’ expectations. On an annual basis, the PPI showed an 8.7% increase—much lower than July’s 9.8% increase. 

Hot inflation data paired with a strong jobs report earlier in the month has investors worried that the Fed will go higher than the expected 75 basis point increase to the federal funds rate, which has already been factored into trading for this month. The Federal Open Market Committee has its next meetings on Sept. 20-21 and is expected to raise the overnight lending rate at that time.

Meanwhile, mortgage interest rates spiked once again as the 10-year Treasury note yield increased to 3.48% as investors reacted to the hot inflation data. Some analysts say that if the 10-year hits 3.5%, the next likely jump could have it moving past 4.00% with mortgage interest rates following suit. Typically, mortgage rates run about 2% higher than the 10-year Treasury note yield. 

Freddie Mac’s 30-year fixed-rate mortgage average came in at 6.02 % for the week, a 0.13% increase from the week before. There is an added issue with this rate increase that is going to be tough to combat as originators try to get more homebuyers into the market. 

Inventory, while slowly increasing over the last few months, is still going to struggle to come back in a significant way because of two things: First, people who refinanced into historically low interest rates will be much less likely to move because buying a new house now would mean much higher rates and prices. Secondly, as we’ve noted in previous reports, home builders are struggling to catch up because of the high cost of labor, materials and land. 

The National Association of Home Builders (NAHB) said August’s data indicates we are in a housing recession with homebuilder sentiment dropping for an eighth straight month in August. The NAHB’s builder confidence index dropped to 49 in August—anything below 50 is considered poor. The 49 point reading is back to 2014 levels and even below where it sat in 2006. 

Freddie Mac’s economists said in their release, “Mortgage rates continued to rise alongside hotter-than-expected inflation numbers this week, exceeding six percent for the first time since late 2008. Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate. This indicates that while home price declines will likely continue, they should not be large.”

As expected this uptick in rates has once again sidelined many potential homebuyers. The Mortgage Bankers Association weekly applications survey showed applications were down 29% year-over-year. Joel Kan, the MBA’s associate vice president of economic and industry forecasting, noted in the report that on average the 30-year fixed-rate mortgage came in above 6% for the first time since 2008.

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Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.