How an increase in inflation may affect the mortgage market
One day after the Federal Reserve decided to hold rates steady, citing inflation concerns, the new inflation data released Thursday showed a 0.3% increase in the Fed’s preferred inflation indicator.
The personal consumption expenditures (PCE) price index also noted a revised 0.2% gain in May, in the report released by the Commerce Department’s Bureau of Economic Analysis.
Over a 12-month period ending in June, the PCE price index increased 2.6%, which is above the 2% target set by the central bank.
The core PCE, which factors out volatile food and energy costs, increased 2.8% from a year ago.
Analysts believe that prices will continue to rise in the second half of the year as the Trump administration finalizes trade deals, and companies pass along some of the increased costs to consumers.
Construction costs could surge
The overall challenge with the expected increase in inflation is a surge in new construction costs and more day-to-day affordability concerns for the homeowner or the potential homebuyer.
Russ Taylor, a wood market expert and analyst, told Mortgage Professional America that the tariff issues could make housing affordability more challenging.
“If it goes up $10,000, $14,000, that’s just going to dent the affordability of homes in the US a little bit further,” he said. “For the consumer, this is not good. All you’re going to do is reduce the ability of consumers to buy a new home, and that’s not good for the economy.”
A report from the Canadian Chamber of Commerce claimed that US tariffs on Canada, including duties on steel and aluminum, could cause homebuilding costs to increase by $14,000 per year by the end of 2027.
However, some domestic producers believe that they can make up for the loss of Canadian imports, which could keep any potential price spikes in check.
Hurting chances of September cut
The rising inflation numbers could damage the possibility of a September rate cut.
Melissa Cohn, regional vice president of William Raveis Mortgage, told Mortgage Professional America that the central bank had no choice but to hold rates.
“I think it was the only choice they had,” Cohn said. “Economic data has shown us that the economy is still moving along. The GDP number for the second quarter was much higher than expected. Employment numbers have been good, and inflation has been creeping higher. I mean, what else could the Fed do?”
Steve Marks, President and CEO of Ohana Mortgage Solutions in Hawaii, highlights that the state already faces severe housing affordability issues, with residents spending the highest percentage of their income on housing nationwide. https://t.co/oN9s441lmh
— Mortgage Professional America Magazine (@MPAMagazineUS) July 30, 2025
CME FedWatch, which tracks the probability of changes to the Fed rate based on the 30-Day Fed Funds futures prices, has reduced the chance of a September cut to 39.2%. The chance that there will be no cut at all for the rest of 2025 has increased to 16.0%.
Cohn said she’s not sure the Fed will have enough data showing the need for a rate cut.
“I think it's quite possible that if the rate of inflation continues to creep higher and doesn't start to settle back down, that the Fed will continue to be in a holding pattern. Then we may not see a rate cut until the end of the year, or possibly not until 2026. It's not what anyone wants to hear, but it's the reality.”
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