Inflation fuels mortgage rate spike from 6% to 7% in Feb. What can you afford?


On February 14, I asked Will hotter early-2023 inflation push mortgage rates back up to 7%? (link below), and now we have the answer: Yes. Today’s worst case rates are about 7% after the Fed’s preferred inflation measure came in hotter than expected this morning. Here’s what’s up.


– On February 14, Consumer Price Index (CPI) inflation was released, and that’s the “headline” number most people understand or at least see a lot.

– That day, annual Core CPI — which excludes volatile food and energy prices, and is what the Fed focuses on for rate policy — came in a 5.6%, which was actually down 10 basis points, but the market considered it to be stubbornly high.

– This plus a scorching jobs report on February 3 caused rates to spike from 6% on February 2 to around 6.75% by February 14.

– Then the Fed’s preferred inflation measure — the Personal Consumption Expenditures index — came out today, and the annual Core PCE number was was up 10 basis points to 4.7%.

– More glaring for bond investors who control rates was the monthly Core PCE rising 20 basis points to 0.6%.

– I’ve highlighted these changes in the table above.

– This is a lot for a single month, especially when investors were thinking inflation was moderating.

– The reaction is mortgage bonds sell off, and rates rise when bond prices fall in a selloff.

– If the current selloff holds, 30-year fixed mortgage rates will end up at 7%.


– So we’ve answered our mid-February question: Yes, inflation has pushed mortgage rates back up to 7%

Now it’s time for a new question: what homes can you afford with 7% mortgage rates?

– Let’s answer using the latest home price data.

– Median existing home prices are now down $54,800 from June peak of $413,800 to $359,000, per NAR.

– This is relevant price data because existing home sales comprise 87% of all sales (new home sales are the rest).

– Monthly all-in cost on a $359,000 home purchase with 5% down and today’s worst case 7.125% rate would be $2993 (mortgage payment, insurance, taxes, mortgage insurance).

– If you had no other monthly debt, you’d need to make $83k* per year to qualify for this.

– If you had $600 in credit card, auto, and other monthly debt, you’d need to make $100k* per year to qualify.

– This is still reasonably affordable, especially if there are two household incomes qualifying.

– This inflation and rate spike sucks, but as you can see from the math, it doesn’t shut the market down.

– And the trick is that home prices will start rising again when rates fall.

– And they will gradually fall during 2023 as the Fed keeps doing its thankless job of raising short term rates to lower inflation.

– So keep your head in the game, and reach out if you have questions.


Home prices affordable at $359k after sales fall 12th straight month

Will hotter early-2023 inflation push mortgage rates back up to 7%?

Home values lost $2.3t since June peak, San Francisco lost most, millennials gained most. Market still worth $45t.

Table above from BEA’s January 2023 PCE report

– * To arrive at these qualifying income numbers, I’m using 43% deb-to-income ratio that Federal regs allow for all mortgages of this size in America.

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