For Clues About The Future Of Mortgage Rates, Watch For Inflation

Real Estate Agent with CONLON/Christie's International Real Estate


Inflation is bad for mortgage ratesHomes are more affordable across the nation as the housing market emerges from a slow winter season with mortgage rates still near 5 percent.

Soft housing and low rates are an excellent combination for home buyers but whereas home values rise with a gradual pace, mortgage rates change in an instant.  It's something worth watching.

Each 0.25% increase to conventional or FHA rates adds approximately $16 per month for each $100,000 borrowed. Mortgage rate volatility can change your household budget.

If you're trying to gauge whether rates will be rising or falling, one keyword for which to listen is "inflation". Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it's not that goods are more expensive, per se. It's that the dollars used to buy them are worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don't want them and bond prices fall.  Mortgage rates move opposite of bond prices. 

Prices down, rates up.

In today's market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a home may be as good as it gets.


Posted by Michael LaFido on March 19, 2010 | Tags: Inflation

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Cari Anderson
Danville, CA

Michael: fatastic summary! I agree, this is the perfect time to buy - if only we'd see more inventory (at least in my market). FTHB's are getting pummeled by all-cash investors. It's not impossible, but it's tough. Even after the tax credit expires, with prices and rates low, buyers will still come out on top and we'll do all we can to help them!

Mar 19, 2010 09:08 AM #1
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Michael:  Excellent explanation of what drives interest rates and their fluctuations!  I particularly liked the point you made regarding small interest rate changes and how they can effect a buyer's bottom line.  All professionals involved in a transaction need to emphasize that point ... especially if a buyer is sitting on the fence regarding a purchase decision.  Being unable to make up your mind can cost you big dollars!  Thanks for helping to get that word out ...


Mar 19, 2010 11:22 AM #2
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Michael LaFido

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