Mortgage Rates to Improve as CPI Data Points to Positive Economic Outlook

The Federal Reserve’s proactive approach to prevent a repeat of the 1970s inflation and double-digit mortgage rates is a testament to their commitment to maintaining a stable economy. Although there are some concerns about a job-loss recession, recent data from the Consumer Price Index (CPI) reveals that the likelihood of 1970s-style inflation is minimal.

In fact, shelter inflation, which accounts for a significant 44.4% of the CPI, has been experiencing a gentle decline, and this trend is expected to continue over the next 12 months. This guarantees that we won’t witness the same inflation boom that occurred in the 1970s. Furthermore, the current cooling of the shelter inflation growth rate and the upcoming availability of over 900,000 apartment units offer additional reassurance that rent inflation from the 1970s is not a concern.

These developments have positive implications for mortgage rates, as a decrease in rent inflation supports the likelihood of lower mortgage rates in the coming year. This aligns with the 2023 outlook presented on CNBC, which predicted a cooling inflation growth rate driven by shelter inflation.

With the implementation of massive rate hikes and a tightening credit environment due to a banking crisis, the prospects of experiencing 1970s inflation seem increasingly remote. This is further evidenced by the most recent CPI report, which showed a 4.9% increase in the all-items index over the last 12 months.

The labor market, though softening, remains resilient, and the 10-year yield appears to have reached its peak. As long as the economy remains firm, the 10-year yield is expected to stay between 3.21%-4.25%, which will keep mortgage rates in check. This optimistic scenario paints a picture of a thriving housing market with mortgage rates around 5.25%.

Though the Federal Reserve has not directly addressed the housing market, their focus on maintaining stability in the labor market will likely contribute to a healthier economy overall. As job openings continue to adjust, the Fed’s response to these changes will be instrumental in shaping the economic landscape.

In conclusion, the recent CPI report reinforces the belief that 1970s-style inflation is not a concern for the current economy. The Federal Reserve’s commitment to economic stability and a healthy labor market will ultimately benefit the housing market and keep mortgage rates in check, providing a solid foundation for future growth.