Mortgage rates saw an increase this week due to an unexpected uptick in inflation.
The average rate on the 30-year fixed-rate mortgage climbed three basis points to 6.84% in the week ending Feb. 13, according to data provided to BW by Zillow. This marked the first increase in the 30-year mortgage rate in four weeks.
Rising prices were the catalyst
The consumer price index played a significant role in the rate increase. Prior to the release of the January CPI report, mortgage rates had been gradually decreasing. However, after the Labor Department reported a 3.3% increase in core prices in January compared to the previous year, mortgage rates reversed their downward trend.
January’s core inflation rate of 3.3% exceeded December’s rate of 3.2%. Most experts had anticipated a decrease or stability in core inflation for January.
As a result of this unexpected inflation surge, the 30-year mortgage rate rose by about one-eighth of a percentage point within the week, leading to an overall increase in the average rate.
Fed rate cuts are paused, with a potential increase on the horizon
The core inflation rate had been on a downward trend in the spring and summer of 2024, prompting the Federal Reserve to implement a total of one percentage point in short-term interest rate cuts in the second half of the year. However, the sudden inflation spike in January has cast doubt on further rate cuts.
Lisa Sturtevant, chief economist for Bright MLS, suggested that the higher-than-expected inflation rate this week could delay Fed rate cuts until the summer. She anticipates that rates will remain in the high 6s as the homebuying season approaches.
Elizabeth Renter, senior economist at BW, warned of a potentially grimmer outlook for prices, the Fed, and interest rates. She indicated that if signs of ongoing inflation persist, a rate hike this year could be possible, with further cuts becoming less likely in the near future.
Kara Ng, senior economist for Zillow Home Loans, noted that markets are factoring in a longer pause from the Fed, which may lead to upward pressure on mortgage rates.
House hunters feeling the impact
The upcoming spring and summer homebuying season could face challenges if inflation and mortgage rates continue to rise, affecting housing market conditions. Prospective buyers, fatigued by years of obstacles, are starting to reconsider their options.
Some individuals are choosing to step back from the current market, opting to save more for a down payment or potential renovations on a fixer-upper property. Carolyn Morganbesser, from Affinity Federal Credit Union, mentioned that some members are expressing frustration and are taking a break to better prepare themselves for future home purchases.