Lower Rents Could Ease Inflation Pressure

What Is Happening Today

Mortgage rates are relatively steady this morning as markets prepare for key inflation data that could influence rate direction in the near term. Mortgage bonds have been flat so far, while stock markets are slightly higher. Investors are closely watching tomorrow’s inflation report, with a particular focus on housing and rent related components, which have played a major role in keeping inflation elevated.

Markets are also paying attention to bond market activity later today, including a 20-year Treasury auction that could impact rates depending on demand. Overall, the tone is cautious but balanced as investors wait for confirmation that inflation pressures, particularly from shelter costs, are continuing to cool.

Rent Trends and Inflation

New rent growth has averaged about 1% over the past few years
Rent data often lags real world conditions because most leases reset annually
Portfolio management adjustments may be overstating shelter inflation by roughly 0.25 to 0.3 per year
Realtor.com reported rents down 1% year over year in November
Rents have now been negative on a year over year basis for 28 consecutive months

These trends suggest shelter inflation may continue to cool as lower rents work their way into official inflation data.

Inflation Report Expectations

Headline inflation year over year is expected to remain at 3%
Monthly headline inflation estimate for November is 0.3
Replacement figure from November 2024 is 0.28
Core inflation year over year is expected to remain at 3%
Monthly core inflation estimate is also 0.3
Replacement figure for core inflation from last year is 0.29

There is growing belief that shelter costs could allow core inflation to come in slightly below expectations.

Shelter Component Breakdown

The most recent shelter reading was 3.58 year over year
The figure being replaced from last November was 0.34
Recent monthly shelter readings have been closer to 0.21
If the current trend continues, core inflation could decline from 3% to roughly 2.9

Shelter remains one of the most important components in determining inflation direction.

Federal Reserve Commentary

Fed officials continue to express concern about overstated labor market strength
Job growth may be overstated by roughly 60,000 jobs per month
Some policymakers believe job creation is near zero
Inflation is viewed as less of a concern than labor market weakness
Estimates suggest neutral rates may be 50 to 100 basis points below current levels
This implies potential room for multiple rate cuts over time

These views reinforce expectations for a gradual and measured policy approach.

Labor Market Signals

Negative job revisions total approximately 548,000 so far this year
Part time employment for economic reasons is at the highest level since mid 2021
Multiple job holders are at cycle highs
The U-6 unemployment rate jumped by 0.7
Historically, increases of 0.5 or more often precede recessions

These indicators suggest the labor market may be weakening beneath the surface.

Mortgage Application Activity

Mortgage rates remained stable around 6.375
Rates are now 3/8 lower than this time last year
Purchase applications declined 3% last week
Purchase volume remains 13% higher year over year
Refinance applications increased 4% last week
Refinance activity is up 86% year over year
Refinances now account for 59% of total applications

This reflects increased borrower sensitivity to rate movement.

Bottom Line

Mortgage markets are increasingly focused on signs that inflation, particularly from housing and rents, is continuing to ease. Falling rent growth, slowing shelter inflation, and signs of labor market weakness are all factors that could support lower interest rates over time.

While markets are waiting on confirmation from upcoming inflation data, the broader trend points toward cooling pressures rather than renewed acceleration. If these trends persist, mortgage rates could see more favorable conditions ahead, even as short term volatility remains part of the process.