Inflation: The latest threat to mortgage rates

July 17th, 2013

Mortgage rates have been rising in recent months, and the impact is already being felt via a drop-off in mortgage application activity. This impact could get even more severe in the wake of a recent inflation report.

On July 16, the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) climbed by 0.5 percent in June, which would translate to just over 6 percent annually. Month-to-month inflation numbers tend to be erratic, but what's troubling about June's inflation is that it was fueled primarily by gasoline prices -- and those prices show no sign of easing. Since mortgage lenders are very sensitive to the threat of inflation, this rise in the CPI could lead to another wave of mortgage rate increases.

Mortgage conditions could get tougher for consumers

Consumers were already feeling the pinch of higher mortgage rates. On July 17, the Mortgage Banker's Association reported that mortgage application activity was down yet again over the past week. That makes 10 out of the past 11 weeks in which mortgage application volume dropped, a reflection of the rising interest rate environment over that time.

Rising rates have had a particular effect on refinancing. Refinancing applications are now down to 63 percent of the total, their lowest level since 2011. If inflation drives mortgage rates even higher, it could start to discourage new buyers as well as refinancers.

Up to this point, mortgage rates had been surging due to anticipation of improved economic growth. The silver lining to this for home buyers is that while their potential mortgages might be getting more expensive, they may be benefiting from the improving economy in the form of better job security, higher wages, or improved investment performance. However, mortgage rates driven higher by inflation would simply bring higher borrowing costs without those offsetting benefits.

Some effects of inflation can be hard to pick up on at first -- prices of consumer goods do not rise in unison, and people tend to buy most things at irregular intervals. However, if inflation drives mortgage rates higher, you can count the cost directly on a mortgage payment calculator. To anyone hoping to buy a house later this year, or looking for an opportunity to refinance a mortgage, a loan calculator will reflect the cost of inflation in stark, dollars-and-cents terms.

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.

Budget deal leaves mortgage rates stable -- for now

October 23rd, 2013

The budget deal removes one potential disruption from the mortgage market, but don't expect rates to stay stable forever....  Read More

Mortgage rates caught in the crossfire of the fiscal showdown in Washington

October 16th, 2013

So far, the fiscal crisis has had a minimal impact on mortgage rates, but that could well change if the US government defaults on any obligations....  Read More

Shutdown squeeze play may cause mortgage fallout

October 09th, 2013

Showdowns over the federal budget and the debt ceiling threaten to put a damper on home prices and mortgage lending....  Read More

Latest figures reveal uptick in refinancing activity

October 02nd, 2013

An uptick in refinancing activity and the continuing rise in home prices show that refinancing opportunities still exist....  Read More

0 Responses to "Inflation: The latest threat to mortgage rates"

No Comments

Leave a Comment