Inflation is on the minds of economists everywhere.

It affects those of us in the housing industry because of actions taken to curb it, specifically interest rate hikes.

When you have a fixed rate of return on an investment like Mortgage Bonds, inflation limits the investors’ buying power due to increased prices. The investor wants to keep pace and therefore expects a commensurate return, which requires a rise in interest rates.

The Federal Reserve’s Role

Part of the Federal Reserve’s job is to address inflation hence its quick succession of rate increases so far this year.

When the Federal Reserve raises interest rates, it tries to slow down economic growth and curb inflation. The most recent hike of 75 basis points was a very aggressive move by Fed leadership. The goal here? To slow down economic growth while curbing levels of price increases across all industries including housing goods, or services offered through credit cards.

Relief For Home Buyers?

So the question we’re asking is, ‘When will home buyers see some relief in mortgage rates?’

To answer that question it’s necessary to take a look at how the inflation rate is calculated.

The inflation rate is worked out on a rolling 12-month basis. When you look at the months after September 2021, the inflation reading is higher than the preceding months and so the comparison to the same month in 2022 could show a smaller increase ie: less inflation. With inflation being the primary driver for mortgage interest rates we can see the possibility of an improvement in both mortgage bonds and mortgage rates later next year.

While it is hard to predict what will happen and predictions don’t always pan out, we should also factor in that with higher mortgage rates, housing prices have started to soften and some experts predict they could fall by as much as 20%.

A drop in home prices would bring more potential buyers into the market, and remember those buyers can refinance if rates eventually come down.