Homebuyers might not want to bet on mortgage rates making any big drops as the spring housing market kicks off.
Inflation ticked up in February by 3.2% year over year, according to the most recent consumer price index summary. That’s the third month in a row that inflation has crept higher, moving further away from the U.S. Federal Reserve’s 2% target. This means the Fed is likely to keep interest rates higher for longer as it strives to bring inflation down while simultaneously achieving a “soft landing” for the nation’s economy.
However, higher rates are bad news for the housing market. While mortgage rates are separate from the Fed’s rates, they have generally been moving in the same direction.
“It means another uptick in mortgage rates,” says Realtor.com® Chief Economist Danielle Hale. “Mortgage rates are likely to top 7% again for a brief period.”
Mortgage rates averaged 6.88% for 30-year fixed-rate loans in the week ending March 6, according to Freddie Mac.
Those high rates plus high home prices and a shortage of homes for sale have made the housing market a difficult place for many buyers to navigate. That’s been particularly true of many first-time homebuyers, who have been struggling with a lack of affordability.
Mortgage rates tumbled in December after the Fed indicated that rate cuts were on the horizon. They then settled into the mid-6% range before heading up again after new data showed the economy was stronger than the Fed would like as it strives to bring inflation back down.
Hale anticipates the Fed won’t cut rates until September due to the latest inflation data. That is likely to keep mortgage rates higher for longer.
“It begs the question: Are the Fed’s rates high enough to rein inflation in?” Hale says. “I don’t really think they’re going to raise rates. But I do think that question is now on the table.”
Core inflation, which strips out more volatile food and energy costs, rose 3.8% year over year in February.
One of the big drivers of inflation in the report was shelter costs, which include rents and the estimated costs of homeownership. It represents about a third of the goods and services that are measured in the consumer price index. Shelter costs decelerated in February, ticking down to 0.4% on a monthly basis from 0.6% in January.
However, shelter prices were still up 5.7% annually in February, when looking at the full year.
The other big uptick in the inflation report was transportation services, which rose 9.9% annually. Services, not including energy, were also up 5.2%.
Meanwhile, utility (piped) gas services, energy prices, and used car and truck prices fell in February.
“The latest data does not fundamentally change what the Fed will likely do—three rate cuts this year,” Lawrence Yun, chief economist of the National Association of Realtors®, said in a statement. “However, with anticipated further easing in inflation, especially as rents in the official measurement are showing calming patterns, five to eight rounds of rate cuts by the end of next year will help lower mortgage rates.”