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Calmer Inflation Means Lower Mortgage Rates – Eventually

The U.S. economy is still dealing with high inflation, but the housing sector is showing signs of cooling off.

The Consumer Price Index rose 0.1% in March from the previous month, according to the latest report from the federal government. It was the smallest uptick in 3 months, and was lower than usual due to an easing in energy costs.

The yearly rate of inflation slowed to 5% from 6% and and touched the lowest level since May 2021.

Shelter continues to be the biggest driver for the monthly increase. Shelter costs rose 0.6% from the previous month, slightly lower than an increase of 0.8% in February. The index for rent and for owners’ equivalent rent both rose 0.5% in March.

“Calmer inflation means lower mortgage rates, eventually,” Lawrence Yun, chief economist at the National Association of Realtors, said in a statement.

Yun noted that inflation has slowed over the last year, which is progress. While “the ideal inflation of 2% is still maybe a year away,” Yun said, “this directional improvement is a clear signal to the Fed to change its tightening monetary policy, especially considering that many regional banks are still on the edge of further interest rate risk blowup.”

Yun said it appears “very likely” that mortgage rates will fall below 6% towards the end of the year. U.S. consumers are slightly less pessimistic, and expect rates to be in the 8% range.

Rent increases also slow down

Rents were up 8.8% from a year ago, but only rose 0.5% on the month, compared to a 0.7% to 0.9% monthly gain over the past year. Yun described this as an “important turn.” “It was inevitable for rent growth to soften, considering the robust apartment construction,” he said.

Private data sources, such as from Apartment List, show that the rent index is only up 2.6% year-over-year, versus the federal government’s estimate of 8.8%, as seen in the chart below.

The indexes capture different aspects of the rental market, but Apartment List’s index is ahead of the government’s measures by four quarters, according to the Cleveland Fed.

Tinkering with interest rates alone will not bring down the cost of housing, Lisa Sturtevant, chief economist at Bright MLS, said in a statement. “The challenge with housing is that there are so many factors beyond the control of the Federal Reserve keeping housing costs high,” she said.

She said more supply is the solution to bring down home prices and make homes less expensive. “The Federal Reserve is not going to solve the problem, no matter how much some people hope that is the case,” she added.

Aarthi Swaminathan,