No Scary Surprises: Cool Inflation Readings Light the Path for Lower Rates

Inflation Cools, Fuels Rate Hopes

Today's Consumer Price Index (CPI) report, the key measure of inflation, came in slightly cooler than market expectations.

• Overall Inflation was reported at 3.0%. The minor rise seen was attributed primarily to a 4.1% rise in gasoline prices.

• Core Inflation (excluding volatile food and energy prices) declined from 3.1% to 3.0% YOY, largely because shelter costs rose less than anticipated.

This cooling trend in inflation is positive for mortgage rates.

Treasury Outlook & The Fed

The 10-Year Treasury yield, which loosely tracks with long-term mortgage rates, traded beneath 4% earlier this week, closing today at 4.0122%.

Technical analysts believe the cooler inflation data, combined with market anticipation of a "friendly" Fed meeting next week, could push the 10-year yield toward the 3.8% level. The market continues to price in expectations for two Federal Reserve rate cuts before the end of the year.

Refis Surge as Rates Drop

The Mortgage Bankers Association (MBA) released its latest weekly application data, showing a sharp divide between purchase and refinance activity:

• Refinances jumped 4%for the week and are up a significant 81% year-over-year (YOY), a clear sign that borrowers are immediately seizing the opportunity presented by lower rates.

• Purchase Volume fell 5%for the week but remains robust, up 20% YOY.

• Adjustable Rate Mortgages (ARMs)continue to hold relevance, making up 11%mof total applications.

Mortgage Rates & The Time Lag Effect

The average 30-year fixed mortgage rate fell to 6.375% from 6.42% the previous week. This rate is now only slightly (just over 1/8%) lower than it was this time last year.

While some media outlets question the lack of an immediate boost to purchase volume, it's critical to remember the "Time Lag Effect." Unlike a refinance, a purchase requires the consumer to be educated on the rate drop, begin the shopping process, find a home, negotiate, and then complete the application. Lower rates are certainly beneficial, but the impact on purchase volume is not instantaneous.