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The meaning of inflation for borrowers and mortgages

borrowers and mortgages
The current combination of low mortgage rates and high inflation is very rare. and, one of those conditions is likely to end soon,

March 04, 2022 –Hispanic Solutions Group

According to specialists, inflation reached 6.8% in November, its highest level since the so-called Reaganomics era and the US war against inflation. If prices continue to rise, mortgage rates will also rise. But there is also a silver lining for borrowers.

The current combination of low mortgage rates and high inflation is very rare. And, one of those conditions is likely to end soon, and if prices stay high, economists say, mortgage rates will rise.

Economist Ralph McLaughlin says, “Inflation tends to drive up mortgage rates, so I anticipate we will enter the new year with higher rates than we ended in 2021.

Last week’s inflation reading of 6.8 percent was the highest point in 39 years, and little relief is in sight. Consumer prices are about to continue to rise, says fellow economist Frank Nothaft, who also said. We’re going to see continued upward pressure on rates, Why Inflation Could Prove A Stubborn Enemy As the annual rate of inflation is known to have topped 4 percent in the spring and then 5 percent this summer, the Federal Reserve called the transient phenomenon.

The central bankers’ initial analysis went something like this: The global economy slammed to a halt in March 2020. Consumers refrained from many expenditures such as eating out, travel and engaging in other typical spending patterns, creating a period of deflation. . At the same time, the federal government filled consumers’ bank accounts with stimulus money, setting the stage for a spike in prices once the pandemic lockdowns eased.

After all, annual inflation is simply a comparison with the prices of the previous year. And this year’s consumers are spending much more than they were a year ago. But once the consumers ran out, the transient argument went, everything would go back to normal.

But, that is not what is happening. There are still shortages of all kinds of goods, including cars, appliances and building materials. The Fed no longer describes inflation as temporary. CoreLogic’s Nothaft sees inflation as a threat to historically low mortgage rates and sees signs that inflation will be with us for a while. Yes, supply chain woes may finally ease, slowing growth in prices for cars, lumber and other items. But those goods are only part of the rate of inflation.

The federal measure of consumer prices also includes housing and health care, and neither of those items will see prices drop when auto production returns to normal.

Today, the unusual combination of high inflation and low mortgage rates makes borrowing more attractive. This is because, if long-term rates don’t rise as prices rise, the real cost of paying the current mortgage becomes cheaper over time.

In short, inflation is generally good news for borrowers, especially those with mortgages. You can repay the loan in increasingly cheaper dollars, which lowers the cost of borrowing.

Given this situation, the Fed could raise rates The inflation outlook is important for mortgage rates because it could force the Fed’s hand. If inflation remains high, the Fed would be forced to raise interest rates in 2022. Specialists opined The central bank does not control mortgage rates, which are closely linked to 10-year Treasury bills. While the Fed’s decisions don’t drive mortgage rates directly the way they do other products, like savings accounts and CD rates, the Fed’s actions indirectly influence the rates consumers pay on their loans. fixed rate mortgages.

“Mortgage rates move based on bond yields in the long run,” says Greg McBride, who is a financial analyst. An increase in mortgage rates is not a sure thing. But the jump in consumer prices is certainly making a rate hike more likely.

Finally, Specialist McBride says: Rising inflation is prompting the Fed to change course, no longer referring to it as transitory, and presumably doubling the pace of its reduction at this week’s meeting.

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