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Mortgages
Advertiser Disclosure


INFLATION IS BACK IN A BIG WAY: WHAT THAT MEANS FOR BORROWERS AND MORTGAGES

Elizabeth W. Kearley/Getty Images


ADVERTISER DISCLOSURE

We are an independent, advertising-supported comparison service. Our goal is to
help you make smarter financial decisions by providing you with interactive
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Bankrate has partnerships with issuers including, but not limited to, American
Express, Bank of America, Capital One, Chase, Citi and Discover.


HOW WE MAKE MONEY.

The offers that appear on this site are from companies that compensate us. This
compensation may impact how and where products appear on this site, including,
for example, the order in which they may appear within the listing categories.
But this compensation does not influence the information we publish, or the
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or financial offers that may be available to you.


Written by
Jeff Ostrowski
Written by
Jeff Ostrowski
Senior mortgage reporter

Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate
in 2020, he wrote about real estate and the economy for the Palm Beach Post and
the South Florida…

Jeff Ostrowski
 * Dec. 13, 2021 /
 * 3 min read

Edited By
Bill McGuire
Edited by
Bill McGuire
Senior mortgage editor

Bill McGuire is senior mortgage editor at Bankrate. He has held editorial posts
at ABC News, Time, Inc., Bloomberg and Consumer Reports Magazine.

Bill McGuire
 * Dec. 13, 2021 /
 * 3 min read

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Inflation hit 6.8 percent in November, its loftiest level since the long-ago era
of Reaganomics and America’s war on inflation. If prices continue to soar,
mortgage rates will head higher, too. But there’s a silver lining to this cloud
for borrowers as well. 

Today’s combination of low mortgage rates and high inflation is exceedingly
rare. So one of those conditions is likely to end soon — and if prices remain
elevated, economists say, mortgage rates will rise.





“Inflation tends to push up mortgage rates, so I anticipate that we’ll head into
the new year with higher rates than we ended 2021 with,” says Ralph McLaughlin,
chief economist at Haus.com.

Last week’s inflation reading of 6.8 percent was the highest point in 39 years,
and there’s little relief in sight. Consumer prices are poised to continue
climbing, says Frank Nothaft, chief economist at real estate data firm
CoreLogic.

And that means mortgage rates are all but sure to rise. “We’re going to see
continued upward pressure on rates,” Nothaft says.


WHY INFLATION MIGHT PROVE A STUBBORN FOE

As the annual rate of inflation topped 4 percent in the spring and then 5
percent this summer, the Federal Reserve labeled the phenomenon “transitory.”

Central bankers’ early analysis went something like this: The world economy
slammed on the brakes in March 2020. Consumers stopped eating out, traveling and
engaging in other typical spending patterns, creating a period of deflation. At
the same time, the federal government filled consumers’ bank accounts with
stimulus money, setting the stage for a spike in prices once pandemic lockdowns
eased.

As economic activity returned to normal, the thinking went, prices would
inevitably spike. After all, annual inflation is simply a comparison to prices a
year earlier. And consumers this year are spending much more than a year ago.
But once consumers spent themselves out, the transitory argument went,
everything would return to normal.

That’s not what’s happening, though. Shortages remain for all manner of goods,
including cars, appliances and building materials. The Fed no longer describes
inflation as temporary.



CoreLogic’s Nothaft views inflation as a threat to historically low mortgage
rates, and he sees signs that inflation will be with us for a while. Yes, it’s
possible that supply chain issues will finally ease, slowing price growth for
cars, lumber and other items. But those goods are only part of the inflation
index. The federal measure of consumer prices also includes housing and health
care — and neither of those items will see prices fall when auto production
returns to normal and port backups end.

“That makes it very, very hard to get inflation back down to the Fed’s 2 percent
target,” Nothaft says.

For now, the unusual combination of high inflation and low mortgage rates makes
borrowing more attractive. That’s because if long-term rates don’t rise as
prices rise, the “real” cost of repaying today’s mortgage grows cheaper over
time.

To put it simply, inflation is generally good news for borrowers, especially
those with mortgages. You get to repay the loan in ever-cheaper dollars, which
eases the cost of borrowing.


THE FED COULD RAISE RATES

The inflation picture matters for mortgage rates because it might force the
Fed’s hand. If inflation remains elevated, the Fed would be compelled to raise
interest rates in 2022.

The central bank doesn’t control mortgage rates, which are closely linked to
10-year Treasury bills. While the Fed’s decisions don’t drive mortgage rates as
directly as they do other products, like savings accounts and CD rates, the
Fed’s actions do indirectly influence the rates consumers pay on their
fixed-rate home loans.

“Mortgage rates move based on long-term bond yields,” says Greg McBride,
Bankrate’s chief financial analyst. “If investors believe inflation will settle
down and not be a longer-term issue, this leads to a more muted response in
mortgage rates despite the ugly inflation numbers we’re currently seeing.”

In other words, a spike in mortgage rates is no sure thing. But the jump in
consumer prices certainly is making a rise in rates more likely.

“The surge in inflation is prompting the Fed to change course, no longer
referring to it as transitory and presumably doubling the pace of their tapering
at this week’s meeting,” McBride says. “Inflation is a problem in the short
term, but if the Fed acts to rein it in, then it won’t be a problem longer-term,
and won’t necessarily lead to a spike in mortgage rates. But the Fed’s
credibility is key to this — and their credibility has taken a beating of late.”


LEARN MORE:

 * How to estimate inflation’s toll on your pocketbook
 * How the Federal Reserve affects mortgage rates
 * There’s a real chance the coronavirus could spawn inflation

 


Written by
Jeff Ostrowski
Senior mortgage reporter
Read more From Jeff
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate
in 2020, he wrote about real estate and the economy for the Palm Beach Post and
the South Florida Business Journal.
Edited by
Bill McGuire
Senior mortgage editor




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