What do the latest CPI numbers mean for the mortgage market?

40-year industry veteran breaks it down

What do the latest CPI numbers mean for the mortgage market?

First, the good news: The latest Consumer Price Index (CPI) numbers released last week show the Fed’s work in taming inflation appears to be working. The bad news: “The battle is not done,” says one noted economist.

The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, as defined by the US Bureau of Labor Statistics (BLS). The index came in at 7.7% -- still much higher than normal and far off from the Fed’s goal of keeping annual inflation at 2%. Yet it is a marked improvement over recent months and indicates the Fed’s rate hikes are working as intended, Melissa Cohn, a 40-year veteran of the mortgage market who is regional vice president of William Raveis Mortgage told Mortgage Professional America.

“We’re now beginning to see the cumulative effects of all the rate hikes that we’ve had this year,” she said. However, she cautions “it’s not going to be a straight line down — rates are going to bounce up and down.” As such, she warns we’re headed for a “‘…roller-coastery’ period of time in the next few months.”

The markets roared back to life in response to the latest CPI report, and mortgage rates saw a slight decline. After topping 7.24% in October, mortgage rates are now hovering at around 6.62%. Cohn noted the CPI rate in September was 8.2% -- higher than the current 7.7%.

Read more: Advice offered to would-be homeowners after latest rate hike

“As a result, the 10-year bond – which is the driving force behind mortgage rates – dropped 30 basis points in one day,” Cohn said of one of the results stemming from the central bank’s actions. “The 10-year Treasury yield was as high as 4.30% probably five weeks ago, and today is 5.78%, which is a half percent lower than it has been.”

To be sure, the Fed will continue to tinker with rates as it continues taming inflation, Cohn noted. “Rates are still very high,” she said. “And they’re going to continue raising rates until they see much stronger evidence that inflation has stopped climbing. But these numbers for October show us that perhaps we’ve turned a corner although we still have tons of work to do. Obviously, 7.7% of inflation is not the 2% goal that the Fed has.”

The tactic now is to lean on delayed gratification rather than its instant cousin, Cohn suggested: “There are clear signs that it’s working,” she said of the Fed’s work. “You have to remember that historically it takes six months for each rate hike to work its way into the economy and start to have impact. The Fed never waited for the first six months to pass to see if one rate hike would work and continuously raised rates all year long.”

According to the BLS, the Consumer Price Index for All Urban Consumers in October increased 0.4%, seasonally adjusted, and rose 7.7% over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.3% in October; up 6.3% over the year. The CPI increase was the same seen in September, according to the BLS.                                                                                           

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The index for shelter contributed over half of the monthly all items increase, with the indexes for gasoline and food also increasing. The energy index increased 1.8% over the month as the gasoline index and the electricity index rose, but the natural gas index decreased. The food index increased 0.6% over the month with the food at home index rising 0.4%.

“There was a report that came out the other day that showed consumer credit card debt is skyrocketing,” Cohn noted. “While consumers still seem to have their wallets open much more than the Fed would like them to, we’re starting to see the chinks in the armor with things like the credit card number,” Cohn said. “Hopefully, we’ll see the Fed end their rate hike cycle by the end of the first quarter of 2023, and then bond yields will come down and rates will get better.”

And the likely impact on mortgage rates: “If I were to forecast, I would say hopefully we’ve seen mortgage rates having peaked. Even if rates just moderate – and aren’t going up half a percentage point each week or month – it will give consumers more confidence they can get pre-approved at today’s rates.”