Will Inflation Lead to Higher Mortgage Rates?

by Tom Tousignant

in Blog, Home Buying, Mortgages, Wealth Building

Inflation is bad for mortgage rates

With all the government spending, a lot of people are rightly concerned about future inflation.  The timing of when inflation from printing more US Dollars hit is the big question.  At some point, the dollar will become worth less than the goods and services that people need to buy, and prices will start to increase.

If you’re trying to predict whether mortgage interest rates will be rising or falling, one key to watch for is “inflation”.  Mortgage rates are highly responsive to inflation.

By definition, inflation is when a currency loses its value; when what used to cost $2.00 now costs $2.15. As consumers, we perceive inflation as goods becoming more expensive.  However, it’s not that thinks cost more, it ‘s that the dollar, or currency to buy it is worth less. Think of the baker who says, “You want to trade me those dollars for my bread?”  Your dollars have to be worth something to him in order to make the trade (sale).

As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  (“You want to buy my mortgage bond with those dollars”)  Mortgage rates move opposite of bond prices, so when bond prices rise, rate drop.

In terms of Wealth Creation, in times of inflation you want to own “things” that are perceived as more valuable than plain old paper dollars, and it’s also a good time to owe money that was used to buy things – you will buy ‘things’ when they are cheap (your dollar buys more) and pay back the lender with inflated dollars that won’t buy as much anymore.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of home ownership will remain relatively low. Combined with the expiring tax credit, the timing to buy a Charlotte home may be as good as it gets.

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