Annual Inflation Rises to 5.6% on July Jump

How does inflation affect mortgage rates?

Fuel costs and food prices are driving steep increases in prices. Other commodities, like clothing are also becoming more expensive. The July monthly increase of 0.8% is twice the expected increase and results in an annual rate of about 12% if it continues. CNN Story.

For the year, the inflation rate is 5.6%. With fuel prices dropping slightly over the past weeks, August may be better, but we can’t be certain.

Now, to the affects of inflation on mortgage interest rates. Mortgage interest rates are mostly driven by the bond markets and the amount that investors are willing to pay for the bonds. The rates they are willing to pay are based on a lot of factors, but bond investors are generally more interested in safety, so they are willing to accept lower rates than with riskier investements.

The problem that inflation presents is that the rate of interest earned from a bond must be discounted by the rate of inflation. If a bond investor gets a yield of 6% and inflation is 5.6%, they are earning 0.4% net after inflation. Not too many people are going to accept this return on their investment.

To put it simply, inflation affects bond yield that affect mortgage interest rates.

As of today, the rate for a 30 year conventional mortgage was about 6.43%. That rate must assume all the economic factors that go into the bond investors decision. So, we must conclude, that as of today, bond investors believe that long-term inflation will be much less than the current rates.

In a few days we will know the affect of today’s news. It takes that long to make it’s way through the market. Our bet is that the actual inflation rate coming in at double the expected number is going to send mortgage rates up, and if August and future month numbers are in the 0.8% range, mortgage rates will move up sharply. Apparently, there is strong belief among investors that these rates of inflation will not stay as high as they are now.

The affect of rising inflation and mortgage rates on Daytona Beach condo and home sales cannot be good. We had a great sales month in July, the best since September 2006, but if mortgage money becomes more expensive, it could negatively impact sales.

As a real estate buyer who will be financing, you should pay close attention to inflation and mortgage interest rates. The affect on mortgage payments is significant. On a $200,000 mortgage, an increase of 1 point is about $130.00 per month.

We’ll report back in a few days if there is a spike in mortgage rates.

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