Mortgage rates, at least in the very short term, could have a neutral-to-positive reaction to the most recent Consumer Price Index report. In the long run, originators might have to plan marketing strategies around an inflationary environment.

This week's CPI/PPI results leave a message for consumers about the housing market.

"For home buyers, the path to lower mortgage rates still runs through lower inflation," Sam Williamson, First American senior economist, said in a statement. "Over time, more restrictive policy may help by convincing investors that inflation will come back under control, but meaningful rate relief remains out of reach for now."

While the headline CPI was 0.4%, the seasonally adjusted core number (which excludes food and energy) showed a 0.3% month-to-month rise. Expectations were for a 0.2% increase in core inflation. This firmer reading "puts another thumb on the scale" for a rate hike at the FOMC meeting, he explained.

"For now, rising incomes and cooling house prices are still helping buyers slowly regain some purchasing power, but borrowing costs are still pulling harder in the affordability tug of war," Williamson said.

But Melissa Cohn, a long-time industry veteran who is regional manager for William Raveis Mortgage, said earlier this week, a potential increase in short-term rates by the Federal Reserve could create a feeling of relief among investors in longer-term bonds, leading to a reduction in mortgage rates. 

Tell your customers now is the time to act

Even after yesterday's Freddie Mac Primary Mortgage Market Survey showed average rates for the 30-year at their highest since the end of the second quarter of 2025, the current market for potential homebuyers on the sidelines right now is still better than the one they are waiting out, said Hector Amendola, president of SimplyPMG.

For lenders, they need a way to reach these customers. Houses for sale are sitting on the market longer and fewer bids are over the asking price.

Current owners are not able to be as picky about who they deal with; the first-time home buyer who had down payment assistance included in their offer was passed over last year because sellers did not want the complication, Amendola said.

"That's not happening as much now," he said. "The rate is worse and the negotiating position is better, and for a lot of buyers the second one matters more."

The six-month long spike in mortgage rates has impacted affordability to a large degree, although it has not caused any material reduction in home prices, said Jason Obradovich, chief investment officer at New American Funding.

"That being said, if these levels of rates hold throughout the remainder of 2026 and into spring of 2027, then we expect home prices to come down to a degree," said Obradovich. "If rates were to return to the pre-March levels then we believe home prices will hold at these levels." 

The relationship between mortgages and Treasurys

The 10-year Treasury yield, one of the benchmarks used in setting the rate for the 30-year fixed product, actually fell 3 basis points initially on Friday morning to 4.91%, following the data release; by 10 a.m., it was still 2 basis points lower than Thursday's close. However, an hour later, the 10-year was back to 4.94%.

Pl, anecdotal reports, including Lender Price data on the National Mortgage News website on Thursday, had the 30-year FRM above 7%. Optimal Blue had the 30-year conforming FRM for Thursday at 6.88%, a 7.5 basis point rise from the previous day.

The historic spread between the 10-year Treasury and 30-year FRM has been about 150 basis points, said Cody Schuiteboer, president and CEO of Best Interest Financial. Right now, Optimal Blue has the spread at 197 basis points.

So the historic number is about right most of the time, "but sometimes it's half that much or more than double," Schuiteboer pointed out. "To assume Treasury rates dictate mortgage rates, will lead to decisions that cost you money."

The federal government's need to issue plenty of new debt, which Treasury yields up, is balanced by "its newly created entities that continue to guarantee/take on new mortgages (helping mortgage yields to stay low)," Schuiteboer said. This latter factor was not present in the 1980s, when mortgage rates in the early part of the decade were over 18%, Freddie Mac data noted.

"That said, one could easily see this confluence of forces generating some spikes and dips," he continued. "Just don't expect a magical floor on Treasury yields to apply for all time, or a ceiling on mortgage rates for that matter."

Should the markets expect the FOMC to hike next week

The CPI data has solidified investor sentiment for next week's Federal Open Market Committee meeting that a 25 basis point increase in the fed funds rate will be on the table.

"It was hot enough to cement a rate hike next week, but not hot enough to confirm that this is the start of a prolonged rate-hiking cycle," said Luke Lango, InvestorPlace technology analyst. 

The market's probability for a rate hike in September was up to 85.6% on Friday morning, according to CME FedWatch. Thursday ended with a 72.4% probability, while for Wednesday, it was approximately 61%.

FOMC rate actions do not directly affect mortgage pricing, but investors take those probabilities into account when looking at the 10-year Treasury yield.

But even before the CPI report on Friday and Thursday's Producer Price Index results, the bias among economists on a Wolters Kluwer panel continued to shift towards the next FOMC move being a hike, largely due to inflation.

Its September Blue Chip Economic Indicators report is now nearly evenly split, with 48% of panelists saying the next move will be an increase, with 52% still supporting a reduction. Last month, it was at 42%; back in May, when a rise first became discussed in the market, just 9% of panelists thought this would be the next move.

This dichotomy in sentiment is likely why just 23% of the panelists think the FOMC will do any sort of action at the September meeting. A mere 2% think the next move will be in October, 7% said December and the vast majority, 67% are stating it will occur sometime next year.

"Every respondent who expects a move at this meeting expects a rate hike," the report said. "Moreover, the consensus expects the FFR at year-end to be 3.76%, which implies a chance of a 25 basis point hike by year end."

The lean towards the next move being a reduction is also seen in panelist expectations of an easier monetary policy, as they expect the fed funds rate at the end of 2027 to be a consensus 3.57%, which is below the Fed's current target of 3.625%.

The panelists' inflation expectations held steady in the survey. So, "the jump in long-term yields in recent months primarily reflects higher real interest rates, which could dampen the current expansion," Wolters Kluwer said. However, the panel expects economic growth to remain on track, driven by continued support from consumers and hefty investment outlays by businesses."

Wolters Kluwer conducted its BCEI survey on Sept. 3 and Sept. 4.