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Mortgage rates fell sharply and shares in publicly-traded lenders and real estate companies jumped Wednesday as investors cheered an encouraging inflation report that’s seen as raising the odds of more Federal Reserve rate cuts this year.

A surprisingly strong jobs report on Jan. 10 had convinced investors that the Fed might not cut rates again until June — and sparked discussion that central bank policymakers might even have to start raising them again.

The latest numbers from the Bureau of Labor Statistics showed the Consumer Price Index rising 0.4 percent from November to December, in line with forecasters’ expectations. But investors were pleasantly surprised that core inflation, which excludes volatile food and energy costs, rose by only 0.2 percent.

“December’s relatively benign CPI report should douse speculation that the Fed’s next move will be to tighten policy,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.

The CME FedWatch Tool, which tracks futures markets to predict the probability of future Fed moves, showed investors on Wednesday pricing in a 44 percent chance that the Fed will start cutting rates again in May, up from 37 percent Tuesday.

Yields on 10-year Treasury notes dropped by as much as 15 basis points in trading Wednesday morning, an indication that mortgage rates also have room to come down. Lender data tracked by Mortgage News Daily showed rates on 30-year fixed-rate home loans falling by 12 basis points, to 7.13 percent.

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Those fears pushed rates on 30-year fixed-rate conforming mortgages above 7 percent this month for the first time since May 2024, according to rate lock data tracked by Optimal Blue.

Optimal Blue data, which lags by a day, showed rates on 30-year fixed-rate conforming mortgages eligible for purchase by Fannie Mae and Freddie Mac averaging 7.05 percent Tuesday.

Progress in fighting inflation stalls


Since hitting a 2024 low of 2.44 percent annual growth in September, the all-items consumer price index (CPI) has climbed for three months in a row, to 2.89 percent in December. At 3.25 percent in December, annual growth in core CPI — which excludes food and energy costs — was down slightly from 3.30 percent in November.

While there’s uncertainty over how policies proposed by the Trump administration might affect the future trajectory of inflation, real estate and lending industry forecasters expect the economy will continue to decelerate this year and that mortgage rates will gradually retreat toward 6 percent.

Samuel Tombs

Tombs said that while demand for goods is likely to strengthen temporarily as consumers bring forward big-ticket purchases to avoid tariff-driven price rises, “the combination of a stronger dollar, flat energy prices and unwinding post-hurricane replacement demand for vehicles will ensure any further increase in CPI core goods inflation is modest.”

At 2.4 percent in November, annual inflation as measured by the Fed’s preferred inflation gauge, the PCE price index, is close to the Fed’s 2 percent target and well below the 7.25 percent post-pandemic high registered in June 2022. The PCE price index data for December is scheduled to be released on Jan. 31.

In the meantime, the runup in mortgage rates has made many would-be sellers reluctant to put their homes on the market for fear of giving up the low rate on their existing loans.

The mortgage “lock-in effect” has helped keep home prices elevated in many markets, although national home price appreciation is expected to slow this year.

Demand for purchase loans dropped 13 percent from November to December and 23 percent from September, according to the latest data from Optimal Blue. But those numbers aren’t seasonally adjusted, and homebuyer mortgage demand was up 18 percent from a year ago.

December mortgage demand up from a year ago

Source: Optimal Blue Market Advantage report, December 2024.

Brennan O’Connell

“December’s data illustrates how the market can adapt to shifting conditions,” Optimal Blue’s Brennan O’Connell said in a statement. “While a seasonal dip was expected, the year-over-year growth reflects resilience and an increasing demand for refinance opportunities driven by rate adjustments.”

Demand for conforming loans eligible for purchase by Fannie Mae and Freddie Mac has been near historic lows for five months, dropping to 51 percent in December.

“This trend illustrates how borrowers are relying increasingly on government and non-conforming loans to finance in a challenging market,” O’Connell said.

A weekly survey of lenders by the Mortgage Bankers Association found applications for purchase loans rose by a seasonally adjusted 27 percent last week when compared to the week before, but were down 2 percent from a year ago.

The survey included an adjustment for the New Year’s holiday, and MBA Deputy Chief Economist Joel Kan cautioned against reading too much into last week’s big jump.

Joel Kan

“This time of the year is a particularly volatile time for application volumes, so it can be more helpful to focus on the level rather than the percent change,” Kan said in a statement. “Purchase applications were 2 percent lower, and refinances were 22 percent higher compared to a year ago.”

Kahn attributed five consecutive weeks of rising mortgage rates to “concerns over a sticky inflation outlook and still too-high budget deficits.”

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

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