If you pay attention to economic headlines, there are a few topics that you will see over and over. One group of headlines has to do with the red hot real estate market. Since last year, mortgage rates have been at rock bottom levels. In turn, home buyers are clamoring to purchase the house of their dreams. At the same time, existing homeowners are looking to get better deals over their current mortgages through refinancing their home loans. The other big group of headlines you see have to deal with inflation. Economists and consumers are all concerned about inflation and all of the signs that it will rise over the next year. While these might appear unrelated, in many ways they are interrelated. Understanding the relationship between mortgage rates and inflation will give you a better picture of the economy and help you be prepared as homeowners and home buyers. 

Inflation is Rising

By all accounts, inflation is rising. Many expect inflation rates to be up to about 4% by next year. Consumers are taking notice. According to a survey by the Federal Reserve Bank of New York, many Americans are noticing that the price of consumer goods are rising and are concerned about inflation. Americans are concerned that they will have to spend more on housing, food, gas, and even college tuition. Experts agree that some inflation is inevitable as the economy picks up steam as we emerge from the restrictions of the pandemic. However, there is not a consensus as to how much inflation to expect. Nor is there a consensus about how worried we should be about inflation. 

The Federal Reserve’s Thoughts on Inflation

Many experts take their cue over what to expect in terms of inflation and its impact on the economy from the Federal Reserve. For this reason, all eyes are on the Federal Reserve this week as they get ready to discuss this topic at one of the meetings. Many will be looking to see if the Federal Reserve believes that rising inflation is merely transitory or if it is a harbinger of worse things to come. Up until this point, the Federal Reserve has recognized that inflation is rising, but seems to be operating from the standpoint that this is a temporary phenomenon. What is unclear is whether or not the Federal Reserve genuinely believes this or if they are just posturing. This week’s meeting will give us all some more clues about what some of the most important bankers in our nation think is happening. 

Mortgage Rates and Inflation

Typically, we expect that mortgage rates and interest rates have a direct relationship with one another. That is to say that as inflation rises, so do mortgage rates. This has everything to do with interest rates set by the Federal Reserve. As inflation increases, the Federal Reserve is expected to increase interest rates, which affects the interest rates on lending, as demonstrated in mortgage rates. The idea behind this is that inflation causes the spending value of currency to decline. It takes more money to buy goods and services. Lenders then charge higher interest rates to make sure that their profits from loans do not lose value. However, we are currently witnessing a disconnect between mortgage rates and inflation data. 

Even though inflation is increasing, interest rates have not been going up at the same levels. To say this is unexpected is an understatement. Does this mean that fears of inflation are unsubstantiated? Not necessarily. Today’s low interest rates in the face of rising inflation might have more to do with other factors than the Federal Reserve’s true level of concern over rising prices. There is a possibility that today’s interest rates, and by proxy, mortgage rates have more to do with investors being overly concerned with inflation. Some economists are suggesting that investors are almost unified in their view of rising inflation that this has led them to short the bond market. Typically, bonds act as a hedge against inflation. However, many are betting against bonds, which is creating a paradoxical relationship between today’s interest rates and inflation.

Will the disconnect between interest rates and inflation continue to hold? The answer is incredibly unclear at the moment. If inflation gets worse, there is a strong chance that investors will stop shorting bonds and instead buy them. In turn, interest rates will rise as many are expecting. This will cause a snowball effect that will cause mortgage rates to rise. 

Inflation and Real Estate

While the future of inflationary trends is unclear, what is clear is that real estate might be impacted. If interest rates increase, then mortgage rates will increase. Clearly, this is not great for home buyers. The lower your mortgage rate the more you save on your home loan in the short term and long term. Lower mortgage rates allow you to lock in lower monthly payments and pay out far less over the life of your loan. If you are a potential home buyer and you think inflation will continue to rise then you have an incentive to buy your home as soon as possible while rates are low.

Inflation also impacts homeowners, but in a different way. Owning a home offers you some level of protection against inflation. Take for example the survey from the Federal Reserve Bank of New York. According to the survey, one of the biggest fears that consumers have regarding inflation is an increase in housing costs. Homeowners do not have to worry about this. Inflation might cause rent to rise, but it does not cause mortgages to rise as long as you have a fixed-rate mortgage. For that reason, you will hear many investors arguing that real estate is an actual hedge against inflation. While basic goods and services increase in cost, so too does your home’s value. At the same time, your mortgage payments stay the same. Homeowners are in a better place to weather inflationary upticks than renters.

Final Thoughts

There is currently a disconnect between mortgage rates and inflationary trends. This might not last, which means that right now is a great opportunity for home buyers. We are in a window of time where you can become a homeowner and gain a hedge against inflation before mortgage rates start to creep up. Mortgage rates always fluctuate, so it is always best to strike while the iron is hot. However, today’s data regarding consumer prices means that quick action might even be more important in today’s economic environment.

If you are tired of renting and hate the thought of having to pay even more in rent in the future, contact us! The team at Peoples Choice Mortgage is here to help you get off the carousel of increasing rent and into a stable mortgage. We offer a complementary mortgage qualifier that will tell you exactly where you stand when it comes to buying a house. If you are one of the Americans that is concerned about rising inflation, then you have a chance to do something about it. Take your future into your own hands and take advantage of the many benefits that come with being a homeowner.