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Yun: Bolder Fed Inflation Policy May Catapult Mortgage Rates

With inflation reaching a new high in June, the Federal Reserve will likely take more aggressive action. And that could influence even higher mortgage rates, says NAR Chief Economist Lawrence Yun.

July 13, 2022

Inflation rose to a new 40-year high in June and is accelerating even faster than expected, according to data from the Bureau of Labor Statistics’ Consumer Price Index. Consumer prices jumped 9.1% last month and posted an annualized inflation rate of 17%, much higher than economists predicted. Consumers faced record-high gas prices and spiking grocery costs last month.

“The Fed may be forced to raise interest rates even more aggressively than planned—even with the rising possibility of a recession on the horizon,” says Lawrence Yun, chief economist for the National Association of REALTORS®. “The mortgage market had already factored in several additional rounds of the Fed’s rate hike but may have to adjust a bit higher based on today’s uncomfortable inflation rate.”

That could be a major blow to aspiring home buyers who have been nervously watching mortgage rates climb drastically over the last few weeks. The 30-year fixed-rate mortgage averaged 5.3% last week, up from 2.9% just a year earlier, according to Freddie Mac. Meanwhile, home prices have risen 15% over the past year. (Note: Home prices are not included in the latest inflation figures. Likewise, the 50% rise in monthly mortgage payments this year versus last year also is not reflected in the CPI, Yun notes.)

A new Forbes.com analysis shows that mortgage rates have contributed to higher monthly mortgage payments more than rising home prices. The publication’s analysis shows that in the past 12 months, the typical monthly payment has increased up to 57%. Higher mortgage rates alone accounted for $408 of the average $725 increase in payments, while higher home prices accounted for $239, the analysis notes. (The remaining balance came from higher mortgage rates that were applied to a higher principal.)

“The homeowners who locked in low interest rates the prior two years have fixed, non-rising monthly mortgage payments,” Yun says. That’s “a different story for renters. Rents rose by 6% from last year and are rising at a 10% annualized rate. Rents will continue to rise in the upcoming years.”

The Federal Reserve’s next meeting is slated for the end of July. Many economists predict the Fed will tighten its monetary policy further to control inflation. That could lead to another 75- or 100-basis point increase in the Fed’s short-term benchmark rate. While the Fed’s benchmark rate does not directly impact mortgage rates, it does influence them. Yun said following the Fed’s last rate hike—its largest since 1994—that the buyer pool could shrink as mortgage rates increase.