Annual inflation dropped to 2.4% last month as housing costs continued decelerating, an upbeat sign for prospective homebuyers. The September inflation figure from the consumer price index released on Thursday was down from 2.5% the prior month, giving Federal Reserve policymakers a positive signal for further rate cuts. For homebuyers, the lower inflation figure should be welcome news. It signals not only price stabilization for basic necessities, but also an economic environment conducive to mortgage rates remaining flat or continuing to fall.
“Lower inflation suggests that mortgage rates will come down further this fall. However, mortgage rates are impacted by broader economic conditions,” says Bright MLS Chief Economist Lisa Sturtevant. “If labor market conditions continue to outpace expectations, we could see mortgage rates increase or at least not fall further. We already saw an uptick in mortgage rates this week on the heels of the strong jobs report.”
Last week, the September jobs report showed a surprisingly resilient labor market, with payroll growth far exceeding expectations and unemployment ticking down slightly to 4.1%. A continued strong labor market could persuade the Fed to slow down or pause its interest rate cuts. Bond markets now predict an 87% chance that the Fed will cut its benchmark rate by a quarter point when policymakers meet next month. In September, the central bank cut its rate by a half-point. Mortgage rates have remained roughly flat since the Fed’s rate cut. The average rate on the 30-year fixed mortgage stood at 6.12% last week, a slight increase from the prior week, but down more than 1.3 percentage points from a year earlier, according to Freddie Mac.
“It is a fool’s errand to try to time mortgage rates, particularly in this unusual housing market and economy,” says Sturtevant. “Prospective homebuyers should find more inventory and should have more leverage in the coming months, which could make it a good time to buy. The decision about when to buy a home, however, will depend not only on external economic conditions, but also on personal financial and family situations.”
Economist Ralph McLaughlin says that the latest inflation figures indicate that “the Fed seems to have flared at the right time to nail a soft landing” with its half-point rate cut last month. He is forecasting two further quarter-point cuts through the end of the year, and predicts mortgage rates will remain stable at least until further inflation data is released at the end of October.
Housing inflation continues to slow
On an annual basis, shelter costs rose 4.9% in September. While rising housing costs are a major contributor to overall inflation, annual shelter inflation continues to decelerate. Currently it is down from 5.2% annual growth in August, and well below its 8.2% peak in March 2023. Shelter accounts for more than a third of the overall consumer price index, but is reported on a delayed basis that can lag up to six months. Costs for homeowners are reported as “owner’s equivalent rent,” or the estimated cost to rent the homeowner’s primary residence. It means that inflation data for shelter may primarily reflect changes in rental markets up to a half-year ago, rather than real-time changes to actual monthly costs for homeowners, who account for two-thirds of the population.
In September, owner’s equivalent rent rose 5.2% from a year ago, faster than the 4.8% annual increase in traditional rent. Owner’s equivalent rent, which accounts for more than a quarter of the overall price index, and traditional rent both rose 0.3% from the prior month.
