Inflation Is Finally Falling—Will Mortgage Rates Follow?

Inflation is finally falling, according to a government report released on Tuesday, and mortgage rates might be close behind.

Over the past year and a half, the U.S. Federal Reserve has been hiking its short-term interest rates to combat inflation. This has helped to push up mortgage rates, which are separate from the Fed’s rates but have been moving in a similar direction.

The Fed’s aggressive moves now appear to have been working. Inflation fell to 3.2% year over year in October, down from a 3.7% year-over-year increase in September, according to the consumer price index released on Tuesday.

That could lead the Fed to hold rates steady and eventually start cutting rates next year if inflation continues to fall. And that could keep mortgage rates flat or push them down a little.

Mortgage rates have been declining over the past month and may continue falling, much to the relief of homebuyers grappling with the lack of affordability in the housing market.

After the inflation report dropped, mortgage rates fell to an average of 7.4% on Tuesday for 30-year fixed-rate loans, according to Mortgage News Daily. That was down from 7.58% on Monday.

Rates had briefly topped 8% last month, according to the outlet.

“Mortgage rates are plunging with the news of inflation calming,” National Association of Realtors® Chief Economist Lawrence Yun said in a statement. “The interest rate rises should be over, and the Fed will have to consider cutting interest rates seriously.”

He anticipates rates to fall into the 6% range by the spring of next year.

However, inflation is still above the Fed’s 2% target. And while the Fed chose to keep rates steady at its last meeting, it hasn’t ruled out future interest rate hikes.

The higher interest rates go, the greater fears are that the country could fall into a recession—something the Fed has been trying to avoid. Typically, the Fed lowers rates in times of economic turmoil to help to stimulate the economy.

“The Fed will continue to watch the economic data while they are having to make policy decisions in an economic environment unlike any we’ve ever seen,” Bright MLS Chief Economist Lisa Sturtevant said in a statement. “A soft landing is still possible, but the road to getting there is definitely still filled with uncertainties.”

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