According to data released by the US Department of Labor on Thursday, the Consumer Price Index (CPI) rose by 3% over the 12 months ending in June, marking the lowest annual increase since March 2021. Monthly data showed a 0.1% decrease in overall prices from May to June, the first monthly decline since the spring 2020 pandemic onset. Decreases in energy and vehicle costs offset the rise in housing prices.
The Labor Department's data indicated continued increases in housing prices last month, accounting for more than a third of the index. Rents rose 5.2% from a year ago, while Owner's Equivalent Rent, which measures what homeowners would pay to rent their own homes, increased by 5.4%.
For potential homebuyers, the overall decline in inflation towards the Fed's 2% target could mean some relief from upward pressure on mortgage rates. Market expectations suggest the central bank may cut its current 5.3% benchmark rate by 0.25 percentage points at its policy meeting in September.
Lisa Sturtevant, Chief Economist at Bright MLS, said, "Potential homebuyers have been eagerly awaiting a decline in borrowing costs. Lower mortgage rates would follow a Fed rate cut... but if the Fed clearly signals its intent, mortgage rates could decline even before an actual rate cut."
Mortgage rates typically follow the trend of the 10-year US Treasury yield, which reflects investor expectations of inflation, economic conditions, and future Fed rate moves. Following the release of new inflation data, the 10-year Treasury yield fell in early trading on Thursday.
Data from Freddie Mac shows that as of the week ending July 3, the average rate for a 30-year fixed-rate mortgage was 6.95%, more than twice what it was three years ago. This change has made homeownership more burdensome for buyers, but potential rate cuts in the coming months may bring hope.
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Earlier this week, Federal Reserve Chairman Jerome Powell highlighted weaknesses in the US labor market during testimony before Congress. Prior to that, the US unemployment rate had risen for three consecutive months, reaching 4.1% in June.
In his testimony to the Senate Banking Committee, Powell stated, "The labor market has clearly cooled in many respects." He emphasized that the Fed now faces dual risks, hinting that policymakers may soon cut rates to prevent increased unemployment and economic recession.
Danielle Hale, Chief Economist at Realtor.com, said, "Today's inflation data underscores recent remarks by Fed Chairman Powell that economic risks and supply-demand imbalances in goods and services are better balanced."
She continued, "Combined with a relatively mild employment report for June, these data should bolster the Fed's confidence in easing rates and possibly signal an imminent rate cut in its July statement. This should help accelerate the decline in mortgage rates, particularly if current trends persist."
Although Powell struck a cautious tone in his testimony, indicating officials want to wait until inflation is "sustainably" moving toward the 2% target before cutting rates, his stance was more moderate than before. Sturtevant noted, "There's a clear distinction between 'moving towards 2%' and 'achieving 2%,' and Chairman Powell's use of this language has heightened expectations that the Fed is nearly ready to lower the federal funds rate."
While bond markets see a low probability of a Fed rate cut at the end of July, according to CME's FedWatch tool, investors currently estimate a 79% chance of a 25-basis-point rate cut at the September meeting.
For homebuyers, the decline in inflation and potential rate cuts undoubtedly bring good news. With lower borrowing costs, more people will be able to afford mortgages, which should stimulate activity in the housing market.
However, caution is still warranted. While rate cuts may provide short-term benefits, long-term economic health depends on broader economic policies and market reactions. Homebuyers should continue to monitor Fed developments and market changes to make informed decisions.
During this period of frequent economic shifts, potential homebuyers and investors should closely follow economic data and policy changes to seize opportunities and optimize their financial decisions.
