Wednesday’s Consumer Price Index report showed that inflation, at least at the consumer level, is more stubborn than many investors and economists had hoped. 

The result was a nasty sell-off in stocks amid a realization of many on Wall Street and elsewhere that the Federal Reserve isn’t going to cut interest rates in the near future  maybe not in 2024. 

The selling hit just everyone nationally involved in real estate:

• Home builders D.R. Horton  (DHI) , off 6.4%. PulteGroup  (PHM) , down 6%. 
• Home-improvement retailers Home Depot  (HD)  and Lowe’s  (LOW) , each down 3%.
• Online real-estate broker Zillow  (Z)   dropped 6%, and home-financial company Rocket Companies  (RKT) , dropped 12.8%.
• The iShares U.S. Home Construction ETF  (ITB)  slumped 4.7%. The ETF’s holdings include builders, building-supply companies and related companies.

The CPI report also raised fears mortgage rates would shoot up a lot just as the annual home-buying season shifts into high gear.

The consensus is still that rate cuts are still coming — but maybe just two cuts, says Sam Stovall, chief investment strategist at CFRA, a New York securities research firm.

Related: Hot inflation report batters stocks; here’s what happens next

The first cut won’t come until September, Stovall predicted Wednesday, with the second not landing until December. 

That means there’s little fuel to pull interest rates lower.  Bond yields, which generate mortgage rates, are up nearly 8 percentage points in April. 

Mortgage rates are higher because they move closely with bond yields. 

Rising rates will make the buying and selling of homes more challenging as the big spring/summer buying season starts. 

How high could mortgage rates go? As high as the day the 30-year rate hit 8% last October? 

Maybe. It would require just about everything to go wrong:

• A big jump in oil prices.
• Increasing violence in the Middle East and in Ukraine.
• A sudden loss of faith in the ability of financial regulators to regulate markets.
• Continued pressure from financial U.S. deficits.

Negotiating the situation now

On Wednesday, the daily survey of Mortgage News Daily, which covers mortgage markets and rates offered by lenders around the country, showed 30-year mortgage rates at around 7.34%. 

That was up from 7.06% on Tuesday, 6.9% on March 11 and 6.6% at the end of of December. 

So, let’s say you’re looking at paying $350,000 for a home with a 20% downpayment. That means a mortgage of $280,000. 

The monthly principal-and-interest payment just went up from about $1,844 on March 11 to $1,927, a change of $83 a month. That’s $996 a year or a 4.5% increase.

If the rate on our mortgage hits 8%, the monthly principal and interest rate payment would jump to $2,054 up 11% from a month ago. 

That does not include taxes and insurance, which come on top of the mortgage payment. (And also are rising.) 

Mortgage rates can be unstable 

Mortgage rates rise and fall, reflecting economic health and inflation. The 30-year rate hit 18.2% in the fall of 1981, when the Fed, chaired at the time by Paul Volcker, ran a take-no-prisoner campaign to crush inflation.

Mortgage rates fell below 10% in the 1990s and under 8% in the summer of 2000. 

But the Fed’s current inflation-busting campaign, begun in 2022, brought the 30-year rate up to 8% on Oct. 19, 2023, Mortgage News Data showed.

The rate dropped back below 8% the next day.

It could happen again if the inflation data won’t budge.

Inflation is now under 3% from a 9% high in 2022, but getting inflation to the Fed’s 2% target has been hard. 

Gasoline prices are up roughly 16.3%. Prices paid at restaurants are up.

Residential property taxes have been rising. 

So, too, are increasing rates for property insurance, especially in regions exposed to hurricanes or other big storms or earthquakes.

Think properties along the storm-prone Gulf Coast or along the Atlantic Oceans and California for quakes. 

In fact, Wednesday’s CPI report showed that prices in the shelter section of the index were responsible for 60% of gains in all items in the index outside of food and energy.

More reports ahead will affect rates 

Whither rates depends on markets and buyer-and-seller  confidence. 

Rates will also be buffeted yet another inflation reading on Thursday, this one the Producer Price Index. 

On April 26, the Bureau of Economic Analysts releases the March Personal Consumption Expenditures Price Index report. The index tracks changes in the prices of goods and services purchased by U.S. consumers and is closely watched by Fed officials. 

Stovall sees rising rates leading to a long-awaited stock-market correction. What he doesn’t know is how high rates will have to climb to cool markets and the economy.

More on rates, bonds and housing:

• Bond markets tell Fed rate story that stocks still ignore
• February inflation surprises with modest uptick, but core pressures ease
• Home insurance companies secretly spy on customers to deny coverage

Lawrence Yun, chief economist of the National Association of Realtors, thinks 7.3% or so will may be the top.

He bases that idea on weekly data from Freddie Mac. Freddie Mac, the big government sponsored company, buys mortgages from lenders, replenishing their cash to make more loans.

Freddie Mac’s survey from last week (before the CPI report) put the 30-year rate at 6.82%. The next weekly survey is due on April 11.

Orphe Divounguy, Zillow’s chief macroeconomist, believes the rate bump won’t last long. Oil prices, a key driver in current inflationary pressures, will ease later in the spring or summer. Plus, he says, the U.S. economy is just too resilient. 

Matthew Graham, who comments on mortgage markets for Mortgage News Daily, thinks it’s too early to say the economic data will produce an 8% mortgage rate again. But if the data is bad, the mortgage market can and will react quickly.

“If the bond market has a bad day in response to data, it will be seen in mortgage rates in a matter of hours at most,” he wrote in an email.

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