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The March 2024 Consumer Price Index (CPI) report showed surprisingly low inflation, but mortgage rates are unlikely to see significant declines in the near future. While core inflation cooled due to a sharp drop in travel costs, persistent high tariffs and ongoing shelter inflation create a conflicting picture for the Federal Reserve. This analysis explains why recent inflation data does not signal relief for prospective homebuyers and what to expect in the coming months.
The core CPI, which excludes volatile food and energy prices, increased by just 0.06% in March, far below the expected 0.24%. This was primarily driven by significant deflation in travel-related categories. Airfares fell 5.3% month-over-month, while hotel prices dropped 4.3%. The overall CPI was actually negative due to a large decline in energy prices. However, a deeper look at shelter costs—a major component for the Fed—paints a different picture. The "lodging away from home" category dragged down the overall shelter number, but rent of primary residence remained steady at 0.3% month-over-month. More importantly, the Owners’ Equivalent Rent (OER)—an estimate of what homeowners would pay to rent their homes—increased to 0.4%, up from 0.3% the previous month. This indicates that housing cost pressures, a key driver of inflation, have not abated.
The March data does not yet reflect the impact of recent tariff announcements. Despite a 90-day pause on reciprocal tariffs with some nations, the trade-weighted average tariff rate remains above 20%, a level not seen in roughly a century. Major tariffs on goods from China, the U.S.'s third-largest trading partner, have been significantly increased. Additional tariffs of 10% on other countries, plus existing levies on items like automobiles and steel, are expected to boost inflation in the coming months. Because mortgage rates are heavily influenced by inflation expectations, the Fed will likely maintain a cautious stance, delaying interest rate cuts that could otherwise lower borrowing costs.
Mortgage rates are closely tied to the 10-year Treasury yield but also include a "spread" that reflects risk and market volatility. Elevated mortgage spreads are adding to borrowing costs, keeping rates higher than they would be based on Treasury yields alone. Given the conflicting signals from the inflation data—cooling travel prices versus stubborn shelter costs and incoming tariff-induced inflation—the Fed is expected to keep monetary policy restrictive. For homebuyers, this means mortgage rates will likely remain elevated in the short to medium term, with any significant drop contingent on a sustained decline in core inflation, particularly in housing metrics.
Based on our experience assessment, prospective buyers should not anticipate a major drop in mortgage rates based on a single favorable inflation report. The broader economic picture, dominated by trade policy and persistent shelter inflation, suggests that borrowing costs will remain high. Focus on improving your credit score and securing pre-approval to navigate the current market effectively.
