Inflation news will drive mortgage rates higher, Freddie Mac says

Even with the uptick in inflation, most observers are expecting the Federal Open Market Committee not to raise short-term rates at its next meeting. But that doesn't mean mortgage rates this week were immune to the report.

The Consumer Price Index rose 0.6% on a seasonally adjusted basis in August, compared with a 0.2% increase in July. Unadjusted, the index was up 3.7% on an annual basis, the Bureau of Labor Statistics said.

If this report was a weather forecast, the outlook for the home lending business would be partly cloudy, said Marty Green, principal at mortgage law firm Polunsky Beitel Green, in a statement.

"I don't think it alters the Fed's path at its next meeting, where they will talk tough but leave rates unchanged," Green said. "However, their path at the November and December meetings is still unclear, as they telegraphed the possibility of another rate increase in 2023."

This report will not change investors' minds about the mortgage rate environment, he said.

They are elevated based on expectations that rates will be falling next year. "So there is an increased likelihood that mortgages originated today will not stay on the books for very long," Green said. "Accordingly, investors require a premium to make the investment."

The Freddie Mac Primary Mortgage Market Survey noted the average for the 30-year fixed rate loan increased for the first time in three weeks to 7.18%, from 7.12% one week ago. A year ago, it was at 6.02%.

But the average for the 15-year FRM was down 1 basis point to 6.51%. It was at 5.21% for the same week last year.

Rates "remain anchored" above 7%, said Sam Khater, Freddie Mac chief economist, in a press release.

"The reacceleration of inflation and strength in the economy is keeping mortgage rates elevated," he continued.

However, Zillow, which tracks rates based on offers made through its website, reported the 30-year FRM at 6.94% on Thursday morning, down three basis points from Wednesday and 7 basis points from last week's average of 7.01%.

Orphe Divounguy, senior macroeconomist at Zillow Home Loans, said the decline reflects investor expectations of slower consumer activity and weaker economic growth in the future.

"The August uptick in inflation — a key driver of Treasury yields and the mortgage rates they influence — was mostly due to supply factors that pushed energy prices higher," Divounguy said in a Wednesday night statement. "However, declining wage inflation coupled with continued strength in employment growth are bringing demand and supply into better balance, putting the U.S. economy on a more sustainable growth path."

Most investors are still expecting the U.S. economy to enter into a recession. In that case, mortgage rates should go down. However, consumer spending is moderating, not crashing, and productivity is on the rise.

"This will likely push longer term Treasury yields higher, preventing any further declines in mortgage rates," Divounguy said.

Right now things are moving sideways, as at noon on Thursday, the 10-year Treasury yield was at 4.28%, up just 3 basis points from Wednesday's close, 2 basis points higher than at the end of the day on Sept. 7 and down 1 basis point from Sept. 6 close.