Falling prices clear the way for low mortgage rates

May 22nd, 2013

On May 16, the Bureau of Labor Statistics (BLS) released its monthly inflation report for April -- or in this case, its monthly deflation report, as overall price levels declined for the second consecutive month. This type of price decline should be very helpful in holding mortgage rates down, and -- get your mortgage calculators ready -- could even lead to lower rates.

Highlights of the inflation report

The BLS reported that the Consumer Price Index (CPI) declined by 0.4 percent in April, following a 0.2 decline in March. Overall, prices have risen by just 1.1 percent during the past 12 months. As is so often the case, energy was the key to the CPI's movement, as declines in gasoline and most other energy prices led the way to falling prices in aggregate.

The Fed's perspective

The Federal Reserve's task is to try to stimulate the economy while keeping inflation in check. Falling prices clear the way for the Fed to focus on stimulating the economy, which means nothing should dissuade it from continuing the policies that have contributed to record lows in mortgage rates.

Mortgage lenders' perspective

A drop in the CPI should also come as a relief to mortgage lenders. Inflation is probably the number one thing that keeps lenders awake at night, especially with mortgage rates this low. As long as inflation remains well under control, mortgage lenders should be able to rest more easily, even with low mortgage rates.

Falling prices should certainly help mortgage rates stay low a little longer, but could they actually cause those rates to drop? It's possible; but if so, don't expect them to go much lower. When mortgage lenders are making loans over 15- and 30-year periods, they have to be more concerned with the likely long-term rate of inflation than with short-term price trends.

From today's mortgage rate levels, even another 10 or 20 basis points would be a surprisingly big drop. If you are looking to buy or refinance, you should test some scenarios on a mortgage payment calculator to see if the money you'd save from such a drop would be worth the risk of possibly missing out on what are already historically low mortgage rates.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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