Will Mortgage Rates Fall This Summer? Here Are Three Things to Know About What Could Happen
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By Ryan Casey Stephens, FPQP®
Special Contributor
There’s a lot of anticipation in the market this week as we await the final result of two crucial inflation metrics. Conventional mortgage rates, largely determined by support for mortgage bonds, have taken a beating lately. Based on expert opinion I called for lower inflation and improved mortgage rates by late spring or early summer. Now that the time has come, are the better interest rates on the way?
Let’s discuss the specifics in this week’s Three Things to Know.
Give Me Shelter
Our hope for a brighter future begins Wednesday with the latest Consumer Price Index (CPI) inflation report. This monthly tool tracks changes in the cost to the consumer for things like food, fuel, electricity, vehicles, clothes, and medical care. The CPI is not the Fed’s favorite inflation report (they prefer the PCE), but they’ll be watching it closely, regardless.
The change in shelter costs will be of special importance this time around. In April of last year, the cost of housing was a dominant force for inflation with an increase of 8.2 percent. The last 12 months have not seen the kind of housing inflation witnessed from 2021 to 2022, so our hope is that this month we’ll see a much lower number. Housing inflation is given extra weight in the CPI since consumers must find somewhere to live, so it makes up nearly two-thirds of the report. That means a big, positive move this month could mean an outsized improvement in inflation.
First Thing to Know:
If housing inflation shows a cooling off the way we expect, the results could be lifesaving for Wednesday’s CPI report. That could be the start of a summer of cooler rates because mortgage bonds won’t receive more support until inflation is clearly on the decline.
Nearly Break-Even
Thursday’s Producer Price Index, or PPI, is a wild card. The PPI measures the increase or decrease in the cost to manufacturers to produce goods. So instead of measuring the final price you and I pay at the pump or the register, it tallies the changes in actual production costs for 500 industries and more than 3,700 product lines produced in the United States.
Unlike the CPI, the PPI hasn’t seen a dramatic decline over 2022. Producer inflation reached a peak around June 2022 and has remained within 0.5 percent of that every month since, so it’s essentially flat. We’re currently hovering around 2.5 percent higher than this time last year, so if we see additional cooling this week we’ll be working our way back down to match the inflation seen from 2021 – 2022. That might not sound like a major win, but getting ourselves back to the status quo is an essential step in the ongoing fight against runaway inflation.
Second Thing to Know:
On Thursday we won’t be hoping for outsized improvement in the PPI. Instead, we’re going to hope that trend since February 2023 continues — a steady march down from the peak of inflation seen in this report.
A Soup of Other Headlines
Beyond these two key reports, it’s going to be difficult to predict how other major events are going to impact the market this week. Jobless claims will drop at the same time as the PPI on Thursday. Since the Fed’s repeatedly stated their desire to see an increase in unemployment prior to easing up, unexpectedly stronger job numbers always create risk for mortgage rate trouble. Four voting members of the Fed happen to be speaking this week, and their comments will be carefully scrutinized for clues on what’s to come. Market futures have the Fed beginning to cut rates as early as July, so comments to the contrary will only create further confusion on Wall Street.
Third Thing to Know:
Unfortunately, major events don’t occur in a vacuum. We can’t hang our hopes for a quick return to lower mortgage rates on the two main inflation reports this week, because other factors complicate the picture. Instead, we’ll be praying that they serve as the catalyst that begins the road to improvement.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
