Understanding How Inflation Affects Mortgage Rates - A Realtor®'s Perspective

As an experienced Realtor® based in Colorado Springs, I frequently find my clients questioning how broader economic trends impact the housing market, particularly mortgage rates. In light of recent developments with the Federal Reserve (the Fed), I thought it apt to share some insights.

You've likely heard of the Fed's relentless endeavor to control inflation. Despite a 12-month streak of decreasing inflation rates, it still hovers above the Fed's target of 2% (see the graph below for more details).

Perhaps you're wondering why the Fed continues to raise the Federal Funds Rate despite apparent progress. The answer lies in their strategy to preemptively counter any resurgence in inflation. In the words of Jerome Powell, the Fed Chairman, their objective is clear and firm:

"We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored."

Greg McBride, Senior VP and Chief Financial Analyst at Bankrate, further sheds light on the reasoning behind the Fed's actions:

"Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more."

A common misconception is that a hike in the Federal Fund Rate directly influences mortgage rates. Although it's not a direct causation, there is a significant correlation. To put it simply, an increase in the Federal Funds Rate often signals an upswing in mortgage rates, as explained in a recent Fortune article

"The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”

The Impact on You as a Colorado Springs Homebuyer

Breaking it down, high inflation typically means higher mortgage rates. But there's good news: if the Fed successfully tames inflation, we can expect to see lower mortgage rates, making homeownership more accessible and affordable for you.

The graph below captures the relationship between inflation and mortgage rates, highlighting a consistent trend: as inflation drops, mortgage rates typically follow suit.

Recent data suggests a decline in inflation (indicated by the blue trend line), and if historical patterns hold true, mortgage rates (the green trend line) are expected to mirror this downward trend. On this note, McBride forecasts:

“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”

In a Nutshell

The trajectory of mortgage rates is significantly influenced by inflation trends. If inflation continues its downward journey, we can anticipate a similar movement in mortgage rates. As your trusted real estate advisor, I'm here to help navigate these macroeconomic trends and their implications for your home buying journey, here in the Pikes Peak Region. Let's connect and chat about how these market changes could affect you.

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