How inflation and mortgage interest rates are related in the economy.

What’s the relationship between inflation and interest rates? With inflation and the housing market making headlines, it’s crucial to grasp the relationship between these two economic factors.

When inflation rates rise, the Federal Reserve takes action by increasing the Fed funds rate. Consequently, borrowing money becomes more expensive, causing interest rates on various financial products, such as car loans, credit cards, and mortgages, to rise. While this measure can help curb inflation, it also affects different industries and the broader economy. Currently, the Fed aims to guide the U.S. towards a ‘soft landing,’ where inflation and economic growth slow without entering a recession.

Recent data suggests we are making progress in that direction. However, certain sectors, including technology, finance, and especially the housing market, have experienced the full impact of higher interest rates.

Inflation has moderated since its peak in June 2022, now hovering around 3%, down from 4% in May and a high of 9.1%. While it’s at its lowest point since March 2021, it remains above the Federal Reserve’s target of 2%. August’s data revealed a 0.2% increase in inflation from June to July, mainly due to rising rent and gas prices.

“Rates will decrease if inflation gets under control.”

Meanwhile, core inflation excludes the volatile prices of food and energy, which can fluctuate significantly due to global economic changes. By focusing on core inflation, we gain a more accurate assessment of overall inflation trends.

So, what does this mean for housing and mortgage rates? According to AP News, analysts anticipate that the Federal Reserve may halt interest rate hikes if inflation continues to trend downward. The next Federal Open Market Committee (FOMC) meeting is scheduled for late September, and the decision on further rate increases hinges on inflation developments.

Forbes suggests that mortgage rates are likely to remain in the range of 6% to 6.9% through the end of 2023. It’s important to note that mortgage rates are influenced by various factors, not just the federal funds rate. They also depend on the yield of the 10-year Treasury note, investor expectations, and other variables.

Instead of waiting for mortgage rates to decrease before making a real estate move, it may be advantageous to act now and consider refinancing later when rates are more favorable. Due to appreciation, you’ll start building equity the sooner you purchase. Then, you can refinance to a lower interest rate when the Fed’s rate comes down. 

If you’re considering a move, purchase, or sale, please don’t hesitate to reach out to us via call, text, or email. We’re eager to discuss your unique situation and assist you with your real estate needs.