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What new inflation data means for homebuyers

inflation data can have a meaningful impact on mortgage rates.  Getty Images

The annual inflation rate has cooled again, the Bureau of Labor Statistics announced Thursday. That rate fell from 3.5% in March to 3.4% in April, followed by today's reading of 3.3% for May. And that may be good news for homebuyers.

The inflation rate isn't just important in terms of understanding how quickly, or slowly, prices are growing in the United States. It also plays a meaningful role in the movement of interest rates. 

The Federal Reserve will conclude its June Federal Open Market Committee (FOMC) meeting later today. That's the meeting where the Fed discusses the state of the economy and any changes it deems necessary to monetary policy, like potentially increasing or decreasing interest rates. And, today's inflation data and the results of the FOMC meeting can have a meaningful impact on homebuyers. So, what can you expect ahead if you're in the market for a new home? 

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What new inflation data means for homebuyers

Inflation data is an important statistic for homebuyers to watch. That's because changes to inflation rates can lead to changes in mortgage rates. So, what does cooling inflation mean for homebuyers?

Interest rates could fall in the months to come

The Federal Reserve's benchmark federal funds rate is currently at a 23-year high. Lenders often consider this benchmark when determining the consumer interest rates they'll offer. The Fed pushed its benchmark to such a high (through a series of several rate hikes) following post-COVID-19 inflation after inflation hit 9.1% in June of 2022

Today's inflation data represents significant cooling from that 9.1% rate. So, will the Fed decrease its benchmark rate following the June FOMC meeting? According to economists, a rate cut is unlikely this month. But, that doesn't mean the federal funds rate will stay elevated forever. 

"Today's inflation isn't likely to directly drive rates down, but this could be a sign that inflation is slowing down, and as we get closer to the Fed's target of 2%, the inflation data gives a little more hope of an interest rate cut in the future," explains Alex Blackwood, CEO and co-founder of the alternative real estate investing platform, Mogul Club.

In fact, some expect that a federal funds rate cut could come in September - which could be a good sign for mortgage rates now and in the future. 

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Lenders may start to cut rates now

While the Fed may be unlikely to cut its benchmark federal funds rate this month, that doesn't mean mortgage lenders will wait to cut their rates. Mortgage rates change regularly and the slightest news can make a meaningful difference in those rates. 

In fact, with inflation cooling for the second month in a row, lenders may already be planning to cut mortgage rates in an effort to attract new buyers. And, if the Federal Reserve even hints at a cut to its federal funds rate in the near term, the probability that lenders will start reducing mortgage rates will only grow. So, good news may be on the horizon for homebuyers. 

It's time to start shopping

With the prospect of falling mortgage rates in the near term, you may wonder if you should sit on the sidelines until that prospect comes to fruition. But, that may be a mistake. As mentioned above, lenders may start cutting interest rates soon. And, when that happens, buyers who have been waiting for lower rates may enter the market - which could increase your competition. So, it may be wise to start house shopping now

Moreover, it may be a good idea to shop lenders now, too. Keep in mind that lenders could start reducing their rates following today's inflation report and the Fed's coming statements. So, shopping now gives you the ability to have a lender in place when you find the home for you and take advantage of those lower rates if they come to fruition. 

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The bottom line

Inflation has cooled for the second straight month and that could be good news for homebuyers. With cooling inflation, lenders could start cutting mortgage rates. But, you shouldn't wait too long to act. Doing so only invites more buy-side competition, which could drive home prices higher. Instead, start shopping for a mortgage and your dream home now to stay ahead of the competition

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