Inflation Remains Muted, But Rates Are on the Rise

Inflation is an important variable in the interest rate lenders charge borrowers. Over time, inflation erodes purchasing power. A dollar in an inflationary environment won't buy as much tomorrow as it will today. To compensate for lost purchasing power, inflation is factored in to interest rates. An inflation premium ensures lenders are able to maintain purchasing power over time.

Today, consumer price inflation remains muted. Thanks to falling oil prices, the aggregate consumer price index has actually declined. When energy and food are stripped from the equation, consumer prices are rising at less than 2% annually. Inflation by Federal Reserve standards is a non-issue.

Private market participants appear to have a slightly different take, though. They appear to be less sanguine on inflation than the Fed and other government data collectors.

In recent weeks, the yield on the 10-year U.S. Treasury note has risen to over 2.1%. In early February, it was below 1.7%. As the 10-year note goes, so, too, goes the rate on the 30-year fixed-rate mortgage.'s survey shows the national average on the 30-year loan above 3.9%. That's a 15-basis-point increase in the past month.

Though we believe interest rates and bond yields will remain low for the relevant future, there are no guarantees. Inflation is an insidious thing. It can appear out of the blue; mostly when it is least expected. When inflation appears out of the blue, so do spikes in mortgage lending rates.

The good news is that rates are still very reasonable across the board. Better yet, these rates are available to a wider swath of borrowers. Thanks to more-accommodating FHA and Freddie Mac and Fannie Mae guidelines. More people can capture rates unavailable to them even a few months ago.

Low rates are an obvious factor in home affordability . Here, we find homes are still a good deal in many metropolitan markets. This is a point we've been emphasizing over the past few months.

More than anything, though, we've been emphasizing the risk of waiting. In a normalized housing market, which we believe prevails today, prices persistently rise over time. The house that cost $200,000 today will likely cost $205,000 next year, and $210,000 the year after. What's more, the rate to finance that purchase could easily be higher too.

So again, we ask, what's the point in waiting? We simply don't see one in today's market.

Information provided by Jessica Regan.

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