Inflation Trends Could Lower Rates

What Is Happening Today

Mortgage rates are holding relatively steady as markets digest new housing and inflation data alongside a gradual return of trading volume after the holidays. Stocks are slightly higher this morning while mortgage bonds are modestly lower, keeping rate movement contained for now. With no major shocks in the market, rates remain range bound as investors look for clearer direction from upcoming economic reports.

Today’s focus is on rental data and housing related inflation, both of which continue to trend lower. Declining rents and slowing home price growth are important components of inflation measures, and these trends are helping reinforce expectations that inflation will continue easing in the months ahead. While volatility remains limited, improving clarity around inflation is a positive backdrop for mortgage rates.

Rental Market Trends

New rents fell 0.8 percent in December
This marks the fifth consecutive month of rent declines
Year over year rents are down 1.3 percent nationally
Rents have been declining on a year over year basis for roughly 2.5 years
Vacancy rates reached a new high of 7.3 percent
Average time on market increased from 36 days to 38.7 days

Rising vacancies and longer leasing times are putting continued downward pressure on rents, which plays a meaningful role in cooling overall inflation.

Inflation Implications

Rent and owners equivalent rent make up the largest share of CPI and PCE inflation reports
Falling rents tend to show up in inflation data with a lag
Continued housing disinflation should lead to more favorable inflation readings ahead
Lower inflation expectations help support mortgage bond prices over time

While rental prices do not move inflation data immediately, sustained declines are a strong signal that broader inflation pressures should continue easing.

Home Price Outlook

According to the Cotality Home Price Insights, home values declined 0.1 percent nationwide in November
Year over year appreciation slowed from 1.1 percent to 1.0 percent
Home values are projected to be flat in December
Forecasts call for home prices to rise 4.3 percent over the next year
A $500,000 home could gain approximately $21,000 in value at that pace

Lower mortgage rates are expected to drive increased buyer demand, which may place renewed upward pressure on home prices later this year.

Economic Activity Snapshot

The ISM Manufacturing Index came in at 47.9 for December
This was below expectations of 48.4
Any reading below 50 signals contraction
Only 2 industries expanded while 15 contracted
Just 11 percent of industries are currently in expansion

Manufacturing data continues to show economic softness, which supports the case for slower growth and easing inflation.

What to Watch This Week

Wednesday: ADP employment report and JOLTS data
Thursday: Weekly jobless claims and the MBS Highway forecast webinar
Friday: BLS jobs report and housing starts

Labor and housing data later this week will play an important role in determining whether rates remain stable or begin to move.

Bottom Line

Housing related inflation continues to cool as rents decline, vacancies rise, and home price growth slows. These trends are critical because housing carries the largest weight in inflation measurements, and sustained softness should support more favorable inflation readings ahead. While mortgage rates remain range bound for now, the underlying data continues to lean in a supportive direction.

As trading volume returns and more economic reports are released, markets may become more reactive. For now, easing inflation pressures tied to housing remain one of the most constructive signals for mortgage rates moving forward.