Just when we thought the mortgage market was finally catching a break, inflation decided to crash the party…and apparently, it wasn’t invited to leave anytime soon.
Tuesday’s hotter-than-expected Consumer Price Index (CPI) report sent bond markets into their biggest selloff since September, pushing the 10-year Treasury yield back toward the 5.00% mark and 30-year fixed mortgage rates above 7.25%. For prospective homebuyers, the news was another unwelcome reminder that the road to lower mortgage rates may be longer and bumpier than anticipated.
Unfortunately, there was very little good news buried in the inflation report. Core CPI, which excludes volatile food and energy prices, increased 0.3% for the month, reinforcing concerns that inflation remains stubbornly elevated despite the Federal Reserve’s efforts to bring it under control and here’s where things get interesting.
Federal Reserve officials, including Chairman Kevin Warsh, have made it increasingly clear that inflation, not unemployment, is their primary concern. Fed Governor Christopher Waller even suggested that a 0.3% core CPI reading could justify a 50-basis-point rate hike in December…Well, guess what? We got 0.3%. The bond market responded accordingly. Investors sold Treasuries, yields jumped approximately 10 basis points, and mortgage rates followed them higher. Remember, mortgage rates are driven more directly by the bond market than by the Federal Reserve’s overnight lending rate.
What Happens Next?
Looking ahead, I see three potential scenarios developing between now and year-end.
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Scenario One: Inflation Remains Elevated.
If upcoming inflation reports continue showing persistent price pressures, the Federal Reserve could raise rates another 25 to 50 basis points in December. Under this scenario, the 10-year Treasury could challenge the 5.10%–5.25% range, potentially pushing 30-year mortgage rates toward 7.50% or higher.
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Scenario Two: Inflation Begins Cooling.
Should upcoming economic reports indicate slowing consumer spending, moderating wage growth, and easing inflation, bond markets could regain their footing. That could move the 10-year Treasury back toward 4.75%, potentially bringing mortgage rates closer to 7.00%–7.125%.
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Scenario Three: Economic Growth Slows Sharply.
A meaningful deterioration in employment or consumer confidence could trigger a flight to quality, sending investors back into Treasuries. Even with inflation concerns, that could create an opportunity for mortgage rates to move below 7.00%.
These are scenarios, not guarantees. Mortgage-backed securities, investor demand, and lender pricing will also influence the outcome.
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My Forecast
My base case is continued volatility, with mortgage rates trading between 7.00% and 7.50% through year-end. I will not rule out a brief move above that range if inflation surprises again. The midweek Veterans Day holiday may amplify short-term volatility, but the real test comes with the next round of inflation and employment reports.
For buyers waiting for substantially lower rates, patience may prove expensive if home prices and housing costs remain elevated…The bottom line? Inflation still holds the steering wheel, and until it loosens its grip, mortgage rates aren’t going anywhere quickly…and for the housing market, the message remains unchanged: Stop waiting for the perfect rate…and start focusing on the right payment.
DC Aiken is Senior Vice President of Lending for CrossCountry Mortgage, NMLS # 658790. For more insights, you can subscribe to his newsletter at dcaiken.com.
The opinions expressed within this article may not reflect the opinions or views of CrossCountry Mortgage, LLC or its affiliates.