Homebuyers may see the lowest rates since March following inflation report

June's unexpectedly cool inflation report could bring early relief to homebuyers, with mortgage rates likely to drop soon.

Redfin is predicting mortgage rates could soon hit their lowest levels since March, based on their analysis of the latest Consumer Price Index (CPI) data.

This forecast stems from the report's implications for Federal Reserve policy and its immediate effect on Treasury yields, which typically mirror mortgage rate movements.

"Ten-year treasury yields are down about 10 basis points right now, and futures markets have now priced in near-certainty for a September rate cut,” said Chen Zhao, Redfin's lead economist, in a statement.

Fed can "start their cutting cycle"

The June inflation report brought surprisingly good news. Core inflation, which doesn't include changeable food and energy prices, barely budged—rising just 0.1% from May to June.

This is the smallest increase we've seen since April 2021 and less than the 0.2% experts predicted. Year to date, core inflation is up 3.3%, again lower than expected.

When you factor in food and energy, overall inflation actually dropped by 0.1% from May to June. For the year, it's up 3.0%. Both these figures are lower than economists thought they'd be.

“With three months of decent inflation readings, the most recent two of which were very low, the Fed should be “sufficiently confident” that inflation is on its way back to target,” said Zhao. “That means they can start their cutting cycle.”

A key factor driving this unexpected cooldown is the significant slowdown in shelter inflation. This category, which covers rent and homeownership costs, has been a major force pushing inflation up for the past couple of years. Now, it's finally showing signs of easing off.

"Shelter inflation coming down should be sticky, not volatile, meaning that we should not expect this category to put upward pressure on overall inflation in coming months as it had been doing the last two years."

The softening inflation data, coupled with recent signs of a slowing labor market, suggests the Federal Reserve may soon pivot from its restrictive monetary policy stance.

While some argue the Fed could cut rates as early as July 31, Zhao believes September is more likely, given the central bank's preference for gradually setting market expectations.

Home prices are still a big obstacle

This inflation report offers a glimmer of hope for potential homebuyers who have been sidelined by high mortgage rates.

We could finally see those pesky "golden handcuffs" lose their grip as homeowners open themselves to the idea of selling their current homes with not-quite-so-shocking rates.

However, while mortgage rates may decrease, home prices remain at record highs in many markets. New data from Realtor.com shows that the average listing price of a home reached $445,000 in June.

It’s these sky-high prices that JP Morgan economists say are still the biggest obstacle to the Fed achieving its 2% inflation target.