Rising Inflation Shoves Mortgage Rates Higher
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Mortgage rates went up this week because of an unexpected resurgence of inflation.
The average rate on the 30-year fixed-rate mortgage rose three basis points, to 6.84%, in the week ending Feb. 13, according to rates provided to NerdWallet by Zillow. A basis point is one one-hundredth of a percentage point. This marked the first rise in the 30-year mortgage rate in four weeks.
Rising prices did it
Blame the consumer price index. Until the January CPI report was released Wednesday morning, mortgage rates had been drifting slowly downward. But mortgage rates abruptly reversed course after the Labor Department said that core prices were 3.3% higher in January than a year before.
January's 3.3% core inflation rate was higher than December's 3.2%. Most forecasters had expected core inflation to fall in January, or at least remain about the same.
As a result of this unpleasant surprise, the 30-year mortgage jumped about one-eighth of a percentage point from Tuesday to Thursday this week. That two-day increase was enough to pull the entire week's average upward.
Fed rate cuts are on hold, and an increase is possible
The core inflation rate had been headed mostly downhill in the spring and summer of 2024, and the Federal Reserve responded by cutting short-term interest rates by a total of one percentage point in the second half of the year. But January's spike in inflation puts further rate cuts in doubt.
"This week’s higher-than-expected inflation rate suggests that Fed rate cuts will be delayed, potentially until the summer," said Lisa Sturtevant, chief economist for Bright MLS, a database of properties for sale in the mid-Atlantic region, in an email. She expects rates to remain in the high 6s as we head into the homebuying season.
Elizabeth Renter, senior economist for NerdWallet, said the outlook for prices, the Fed and interest rates could get even grimmer: "If signals of ongoing inflationary pressure continue, particularly in the midst of potentially inflationary policies, a rate hike wouldn't be completely out of the question this year, and further cuts less likely anytime soon," she wrote on LinkedIn.
Kara Ng, senior economist for Zillow Home Loans, didn't go so far as to warn of a possible Fed rate increase, but said in a statement that "markets are pricing in a longer pause from the Fed, which is likely to exert upward pressure on mortgage rates."
House hunters are bummed
The spring and summer homebuying season could fizzle out if inflation and mortgage rates keep rising and degrading housing market conditions. Would-be buyers have endured years of frustration and some are giving up, says Carolyn Morganbesser, assistant vice president of mortgage originations for Affinity Federal Credit Union, which has branches in New Jersey, New York and Connecticut.
"We had members come back to us and say, 'You know what? I just can't take another no,'” Morganbesser says. Instead, she said, some members are backing away from the current market, choosing to save more money toward a down payment or for renovations in case they end up buying a house that needs some work.
