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Homebuyers are taking advantage of a pullback in mortgage rates from January highs — a trend that may be in jeopardy despite the release of an encouraging inflation report Wednesday.
The Consumer Price Index showed annual inflation falling in February for the first time in four months, to 2.8 percent, the Bureau of Labor Statistics reported.
But bond market investors who fund most mortgages are still waiting to see how a burgeoning trade war with America’s trading partners might impact consumer prices.
Canada and the European Union on Wednesday responded to the Trump administration’s imposition of increased tariffs on steel and aluminum by imposing taxes on U.S. exports of consumer goods and food, The Associated Press reported.
Yields on 10-year Treasurys, a barometer for mortgage rates, were up slightly on Wednesday despite a CPI report that showed inflation eased more than expected last month. Data tracked by Mortgage News Daily showed rates on 30-year fixed-rate mortgages moving up seven basis points Tuesday and another three basis points Wednesday.
Evidence that inflation is easing would usually push rates down, as investors gain confidence that the Federal Reserve will start cutting rates again. After bringing short-term rates down by a full percentage point in the final months of 2024, the Fed put further easing on hold in January as inflation moved away from the central bank’s 2 percent target.
Investors are worried that a trade war could mean higher prices for consumers. But they also have to weigh the fact that February’s surprisingly small increase in core CPI — which excludes food and energy prices — was largely due to a decline in air fares, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said.
Samuel Tombs
“Airline fares had decoupled recently from underlying costs due to strong demand late last year, which unwound in February,” Tombs said in a note to clients. “We doubt fares will rebound in March, as the recent fall in consumers’ confidence points to more cautious spending on discretionary services ahead.”
Tombs said the decline in airfares won’t affect the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, which showed annual inflation cooling to 2.5 percent in January. The February PCE price index won’t be released until March 28.
Mortgage rates bottomed March 3
Since hitting a 2025 high of 7.05 percent on Jan. 14, rates on 30-year fixed-rate mortgages had been falling, hitting a low for the year of 6.55 percent on March 3, according to rate lock data tracked by Optimal Blue.
Surveys by the Mortgage Bankers Association (MBA) show homebuyers have responded to lower rates, and that many existing homeowners are also rushing to refinance.
Applications for purchase loans were up by a seasonally adjusted 7 percent last week compared to the week before, and up 4 percent from a year ago. Requests to refinance were up 16 percent week over week and 90 percent from a year ago, the MBA’s lender surveys show.
“Mortgage rates declined for the sixth consecutive week, with the 30-year fixed rate dropping to 6.67 percent, the lowest level since October 2024,” MBA Deputy Chief Economist Joel Kan said in a statement. “As a result, applications increased over the week and were up 31 percent from a year ago.”
But mortgage rates are headed back up this month, as bond market investors try to get a handle on what tariffs the Trump administration will actually impose — and how America’s trading partners will respond.
Tombs said consumer prices “have been largely unaffected so far” by a 10 percent tariff on goods imported from China on Feb. 4. But the Trump administration has doubled tariffs on Chinese goods to 20 percent — a move that forecasters at Pantheon Macroeconomics think will probably boost consumer prices by 0.2 percent.
If the Trump administration follows through on threats to impose 25 percent tariffs on imports from Mexico and Canada on April 2, those tariffs would be likely to raise consumer prices by another 0.5 percent, Tombs said.
Annual inflation eases in February
While the CPI all-items index posted its first drop in annual inflation in four months, core CPI has been stubbornly holding steady above 3 percent.
“All told, we still think that core CPI inflation will be broadly unchanged from February’s 3.1 percent rate at the end of this year, as the boost from tariffs will be broadly offset by a further decline in services inflation,” Tombs said. “That should enable the Fed to focus on supporting the ailing economy, easing by about 75 [basis points] over the course of 2025.”
Futures markets tracked by the CME FedWatch tool show investors don’t expect the Fed to resume rate cuts until June. After Wednesday’s CPI report, futures markets were pricing in an 80 percent chance of one or more Fed rate cuts by June 18. That’s down from 84 percent on Tuesday but up from 34 percent on Feb. 12.
Sam Williamson
The “small downside surprise” in the February CPI report “is an encouraging sign for the Federal Reserve’s ongoing effort to bring down inflation,” First American Senior Economist Sam Williamson said, in a statement. “The modest improvement is still not enough to prompt a March rate cut, but it does potentially give the Fed greater flexibility to consider more rate cuts later this year.”
Mortgage credit eases again
Source: Mortgage Bankers Association analysis of ICE Mortgage Technology data.
Looking beyond rates, an MBA analysis of data from ICE Mortgage Technology showed mortgage credit availability increased in February for the third consecutive month, to the highest level since March 2023.
The MBA’s Mortgage Credit Availability Index (MCAI), which was benchmarked to 100 in March 2012, rose by 1.4 percent in February to 100.4, indicating credit standards loosened.
The growth in credit supply “was driven by greater investor appetite for ARM and cashout refinance loans,” Kan said. “Similar to what we have seen in recent months, the growth of non-QM loan programs pushed the jumbo index higher over the month.”
A small but growing minority of Americans think it’s a good time to buy a home. While only 24 percent of homeowners and renters surveyed by Fannie Mae last month said February was a good time to buy, that’s up from 22 percent in January and 14 percent last May — an all-time low in surveys dating to 2010.
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