Inflation is still hot. Why did the market make a slight improvement?
We received one of the most important inflation reports of the month, and at first glance, it didn't look particularly good.
Inflation is still running higher than the Federal Reserve wants, gasoline prices have jumped, and the probability of another Fed rate hike increased significantly.
Yet the mortgage bond market improved after the report.
Confusing? Absolutely.
But underneath the headline numbers were some encouraging signs that could matter for housing and mortgage rates going forward.
Here’s what your clients actually need to know.
📰 What’s Happening
INFLATION IS STILL TOO HIGH
Consumer prices rose 0.4% in August, while annual inflation remained at 3.4%.
The Fed ultimately wants inflation closer to 2%, so we're clearly not there yet. Recent producer-price data also showed continued inflation pressure, particularly from energy.
One of the biggest culprits?
Energy.
Gasoline prices jumped nearly 4% during the month and are substantially higher than they were a year ago.
Translation:
Inflation hasn't been defeated, and higher energy prices are making the Fed's job harder.
That's why another Fed rate increase is very much on the table.
BUT THERE WAS SOME GOOD NEWS UNDERNEATH THE HEADLINE
When we remove volatile food and energy costs, annual core inflation actually moved down from 2.5% to 2.4%.
Housing costs were also relatively well behaved.
And when we dig further into the report, a meaningful amount of the monthly inflation came from a handful of categories, including airfare and education/communication services.
Translation:
Prices aren't suddenly accelerating everywhere.
A few specific areas are creating a disproportionate amount of the current inflation pressure.
WHY SHOULD A HOMEBUYER CARE ABOUT ANY OF THIS?
Because inflation is one of the biggest forces influencing mortgage rates.
Think of it this way:
Persistent inflation → pressure for higher rates
Cooling inflation → more room for rates to improve
But here's where it gets interesting.
Mortgage rates don't simply follow whatever the Federal Reserve does.
Markets are constantly trying to predict what inflation and the economy will look like months from now.
So even though expectations for a Fed hike increased after today's report, the mortgage bond market initially responded favorably.
Translation:
A Fed hike does not automatically mean mortgage rates rise by the same amount.
And that's one of the biggest misconceptions we hear from consumers.
WHY COULD THE MARKET ACTUALLY LIKE A FED RATE HIKE?
This sounds backward, but it's important.
If investors believe the Fed is serious about controlling inflation, a rate increase today could potentially reduce the risk of inflation becoming an even bigger problem tomorrow.
And long-term mortgage rates care enormously about future inflation.
Think of it like putting out a fire:
The market may prefer a little more water now if it believes that prevents a much larger fire later.
That doesn't guarantee mortgage rates will improve.
But it helps explain why you can occasionally see the Fed raise its short-term rate while mortgage rates react very differently.
PERSPECTIVE BUYERS SHOULDN'T MISS
Today's rate environment is frustrating.
But context matters.
The 10-year Treasury yield recently approached levels last seen in 2023. Yet according to the market commentary we're following, mortgage rates are roughly 1 percentage point better than they were when Treasury yields were at similar levels in 2023.
Translation:
The relationship between Treasury yields and mortgage rates has improved considerably.
That's one reason we don't want clients assuming:
“If Treasury yields go back to X, my mortgage rate has to go back to Y.”
The mortgage market has changed.
WHAT THIS MEANS FOR YOUR CLIENTS
🏡 BUYERS
If you've been waiting for the Fed to start cutting rates before buying a home, this week is a great reminder that the Fed doesn't control mortgage rates directly. Don't build your entire home buying plan around the next Fed announcement.
Instead, build it around your monthly payment. Know what works today. Know what payment would cause you to take action.
And know how much your purchasing power changes if rates move by 0.25%, 0.50% or 1%. Then you're prepared regardless of what the Fed announces.
🏷️ SELLERS
Affordability is still driving buyer behavior. That makes financing strategy an increasingly powerful part of selling a home.
Instead of automatically considering a price reduction, it may be worth comparing that reduction against a seller credit that lowers the buyer's financing costs.
The same seller dollars can create very different monthly-payment results.
🔑 HOMEOWNERS
If you have a higher mortgage rate, don't wait for someone on TV to announce that it's officially “time to refinance.”
Know your number beforehand.
If refinancing at a certain rate would save $300, $500 or $800 per month, establish that target now.
Then you're watching for your opportunity, not trying to predict the entire market.
THE KD TEAM TAKEAWAY: DON'T WATCH THE FED. WATCH YOUR NUMBER.
This is the part I think is most valuable this week.
Everyone wants to know:
“What is the Fed going to do?”
But that's not actually the most important question for a homebuyer.
A better question is:
“What number would make me move?”
If today's payment is $5,500 but $5,100 makes the home comfortable, that's your number.
If you're a homeowner paying 7.25% and refinancing becomes worthwhile at 6.50%, that's your number.
If you're selling and a $10,000 credit creates more buyer affordability than a $10,000 price reduction, that's your number.
Stop trying to predict the market. Define the opportunity before it arrives.
🎯 INTRODUCING: KNOW YOUR NUMBER
Have a buyer, seller or homeowner who is waiting for “something” to change?
Send them our way.
We'll create a personalized Know Your Number Analysis showing:
✓ The payment today
✓ The rate/payment that would trigger action
✓ Purchasing power at different rates
✓ Buy Now vs. Wait scenarios
✓ Seller credit opportunities
✓ Refinance savings and break-even points
Because the people who benefit most from the next market move won't necessarily be the ones who predicted it.
They'll be the ones who already knew what they were waiting for.
KD Team