On Tuesday, the Bureau of Labor Statistics reported the consumer price index hit 3.8% in April. That is the highest annual inflation reading in nearly three years. The 10-year Treasury yield jumped on the release. Mortgage rates followed.
The trigger is the US-Iran war, which has pushed energy prices higher since late February. But the inflation data now shows the effect is broad-based, not transitory. The 30-year fixed-rate mortgage sat at 6.37% for the week ending May 7, per Freddie Mac. That is the second consecutive weekly increase. The 15-year fixed rate also inched up.
Glen Weinberg of Fairview Commercial Lending put it bluntly: the inflation reading will not help the market in any way. He sees a new scenario emerging: rate increases. Not cuts. The Federal Reserve, which does not set mortgage rates but influences them through its own rate decisions, now faces a dilemma.
Oxford Economics chief US economist Michael Pearce still expects a cut this year, but he pushed his forecast from June to December. That is a six-month delay. A firmer economy and stickier inflation will keep the Fed on a prolonged hold, he said. The Iran war adds downside risk via energy prices, stock market impact, and supply chain disruption.
Weinberg is more definitive. He said any rate cuts are off the table through year-end. A possible increase is now a real scenario. Best case: the Fed sits tight. But the data is moving in the wrong direction for borrowers.
The arithmetic is straightforward. Mortgage rates are influenced by the 10-year Treasury yield. That yield rises when inflation expectations rise. Weinberg sees a risk of mortgage rates rising by as much as 50 basis points if price shocks persist. That would push the 30-year fixed rate toward 7%.
Homebuying activity is already anemic. Sales volumes are low. The spring market was not going to be strong. The inflation data does not derail it; it just ensures the market stays weak. No catalyst for improvement exists.
The Fed's next chair, presumably Kevin Warsh, will inherit this environment. Some market participants still expect cuts before year-end. That view now looks optimistic. The data does not support it.
What does this mean for commercial real estate capital markets? Higher mortgage rates for longer compress cap rates and increase debt service costs. Floating-rate borrowers face continued pressure. The refi wall grows taller. Lenders will remain cautious on new originations.
The broader lesson: the inflation cycle is not over. The Iran war introduced a supply shock that the Fed cannot offset with demand management. The central bank's tools are limited. Rate cuts are not coming soon. The market must adjust to a higher-for-longer rate environment.
Weinberg's final point is the most important: a new scenario has been introduced. Rate increases are now a real possibility. That changes the risk calculus for every borrower, lender, and investor in the market.