The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The U.S. Bureau of Labor Statistics (BLS) calculates the CPIas a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
January’s CPI (consumer price index) inflation data was released this morning and came in right at expectations of 6.5%. This is good news as it’s notably lower than December’s reading of 7.1%, and CPI inflation has now moved lower for 6 consecutive months, with the last 3 CPI reports being the real catalyst in mortgage rates lower. While this 6.5% CPI figure remains notably higher than the Fed’s target of 2% inflation, today’s report was still good news in the context of how inflation/mortgage rate are recovering from the distortion created by the Fed’s red line full throttle bond purchase program during Covid, and all supply chain related Covid issues which are mostly in the rear view mirror. Here’s some context to share with clients and what it all means for mortgage rates.
We’re currently in this interesting window of time where it’s valuable for real estate investors to understand that increases to the Fed Funds rate does NOT mean mortgage rates increase. Sometimes reiterating the mechanics of what determines mortgage rates (bond prices, which have move significant been determine by 2 things in the past few years: the Fed’s bond purchase program and inflation) can instigate the question of; “why does it matter if the Fed hiking the Fed Funds rate isn’t what drives mortgage rates higher, it seem they’re usually moving in the same direction?”, in other words – does it really matter if it’s correlation or causation?
Answer: yes – very much so, and the current market is precisely why it’s so important to clearly communicate the differences & mechanics for clients. As of November, we are now in a phase where the Fed will continue to hike the Fed Funds rate, while mortgage rates are moving lower. This is key for those looking to capitalize on a real estate opportunity before mass market sentiment pendulums back.
Here’s what’s going on with inflation mortgage rates: CPI, a primary measure of inflation, had peaked at 9.1% this past summer. The Fed hikes the Fed Funds rates (short term consumer debts) to fight this inflation. The November & December CPI reports both came in notably lower/better than the market expectation, this benefited bond prices, and therefore mortgage rates. Since mid-November we’ve been talking about how; unless we got surprisingly bad news on inflation in the months ahead, it looks like mortgage rates peaked that first week in November. Today’s CPI data coming in right at expectations further reinforces this trend. To put into perspective, the 10 yr Treasury, which is what Jumbo mortgage rates follow, hit ~4.35% that last week of October, then had it’s best day of the year the same day the November CPI report came in lower than expectations, then again moved another leg lower after the December CPI data, and is settled in today at ~3.4%. This is significant good news as we all know higher mortgage rates are part of the downward pressure on real estate prices, and vice versa.
We’re still seeing Jumbo rates today a bit lower than conforming, and the larger loan amounts actually pricing the best. For example today, a ~$2.0M purchase with 20% down, can get a 30 yr fix in the 5%’s with no points, and as low as ~5.25% with a little over a point. This is a historically healthy place for mortgage rates to be.
In sum, the headlines will soon again talk about rates moving higher when the Fed increases the Fed Funds rate again, which is coming, and meanwhile mortgage rates have already come down to a healthy level.