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Mortgage Rates Climb in October Amid Accelerating Inflation – Eye On Housing

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Mortgage rates rose sharply again in October as the U.S. treasury yields surged. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 7.33% in October, up 47 basis points (bps) from September. The rate reached 7.40% in early October, its highest level since 2023, before easing toward the end of the month. Since the conflict in the Middle East began, the 30-year mortgage rate has increased by approximately 128 bps. The 15-year fixed-rate mortgage averaged 6.66% in October, up 46 bps from September and 123 bps from the end of February. Compared with a year ago, the average 30-year and 15-year mortgage rates were higher by 108 bps and 117 bps, respectively.

The 10-year Treasury yield, a key benchmark for long-term borrowing, increased 21 bps to an average of 5.15% in October, although yields eased during the latter part of the month. Inflation concerns continued to put upward pressure on Treasury yields, as elevated energy prices stemming from the ongoing conflict with Iran contributed to accelerating inflation. Inflation accelerated to 3.7% in September from 3.4% in August. Energy prices were a major contributor, with fuel oil prices rising 15.3% and gasoline prices increasing 9.1% over the month.

At its latest meeting, the Federal Reserve held the federal funds rate unchanged at 3.75% to 4.00%. However, there were two dissenters who voted for a 25 bps increase. The Federal Open Market Committee (FOMC) described economic activity as expanding at a “strong pace,” an improvement from the “solid pace” noted in September. The committee pointed to resilient consumer spending and strong business investment as signs of continued economic strength, while noting that inflation remained elevated and uncertainty persisted.



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PCE Inflation Accelerated in September – Eye On Housing

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The Federal Reserve’s preferred inflation gauge accelerated in September after holding at 3.0% for three consecutive months, complicating the Fed’s path to its 2% target. Consumer spending continued to be pushed up by elevated energy prices rather than income growth, driving the personal saving rate to the lowest level in nearly four years.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.6% in September from a year ago, the fastest pace since May, according to the Bureau of Economic Analysis. The “core” PCE price index, which excludes food and energy, rose 3.1% over the past twelve months, following a 3.0% increase last month. Core PCE has remained at or above 3.0% since the start of the Iran conflict, suggesting inflation pressure persists even excluding volatile energy prices.

Consumer spending rose 0.5% in September, while real spending, adjusted to remove inflation, remained unchanged. Meanwhile, personal income rose 0.2% in September. This growth was led by increases in compensation and government social benefits. Real disposable income—income adjusted for taxes and inflation—fell 0.3%. On a year-over-year basis, personal income was 4.1% higher, and real (inflation-adjusted) disposable income was up 1.0%.

With spending growth outpacing income growth, the personal saving rate fell to 3.8% in September, the lowest level since November 2022. The personal saving rate has been on a downward trend since the start of this year, with the exception of July.



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Building Material Price Inflation Nears Four Year High – Eye On Housing

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The Producer Price Index for final demand was up 1.3% in September, after rising 0.5% in August. Compared to a year ago, final demand prices were up 6.3%. The price of goods used in new residential construction (including energy) was up 1.8% over the month and up 9.7% from last year, while the price of services was up 2.2% over the month and up 11.3% from last year. Combining goods and services, the price index for inputs to new residential construction was up 2.0% in September and 10.3% higher than last year.

Input Goods

The goods component has a larger importance to the inputs to residential construction price index, representing around 60% of the total. On a monthly basis, the price of input goods to new residential construction was up 1.8% in September after rising 0.9% in August.

The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring remaining goods. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index.

Energy input prices rose 13.0% in September and were 64.1% higher than a year ago. Building material prices were up 0.4% in September and up 5.5% compared to one year ago, the highest level since 8.0% in December 2022.

Price increases for energy products outpaced other materials. No. 2 diesel fuel prices were up 24.2% over the month and 115.2% higher than a year ago. Unleaded regular gasoline prices rose 13.0% over the month and were 66.1% higher than a year ago. Outside of energy products, particleboard and fiberboard prices rose 3.5% over the month and were up 7.8%, meanwhile prices for mineral wool (f[RD2.1]or insulation) rose 2.8% over the month and were up 1.6% from a year ago. Softwood veneer and plywood prices were up 2.7% over the month and 15.9% higher than a year ago.

Input Services

Prices for service inputs to residential construction rose 2.2% in September. On a year-over-year basis, service input prices were up 11.3%, the highest since April 2022 when service prices rose 17.7% year-over-year. The price index for service inputs to residential construction can be broken out into three separate components: a trade services component, a transportation and warehousing services component, and a services excluding trade, transportation, and warehousing component (other services).

The most significant component is trade services (around 60%), followed by other services (around 29%), and finally transportation and warehousing services (around 11%). The largest component, trade services, was up 14.0% from a year ago. The price of transportation and warehousing services has risen 19.3% over the year, while prices for other services were up 3.1% over the year.



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Inflation Accelerated in September – Eye On Housing

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Higher energy prices pushed inflation to a four-month high in September, keeping pressure on the Fed as inflation has remained above its 2% target for more than five years. Gasoline prices remained the largest driver of headline inflation, accounting for over half of the monthly increase.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.7% in September from a year ago, following a 3.4% increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.6% over the past twelve months, following a 2.4% increase in August. The housing shelter index, which makes up a large portion of the core CPI, rose 3.2% over the year, following a 3.0% increase last month. The component index for food rose by 2.5% over the year, and the energy component index increased by 20.4%. Meanwhile, technology prices continued to climb amid strong AI demand, with price indexes for computers and software increasing 9.7% and 28.4% from a year ago.

On a monthly basis, the CPI rose by 0.6% in September (seasonally adjusted), while the “core” CPI increased by 0.3%.

The price index for a broad set of energy sources increased by 5.2% in September, as decline in natural gas (-0.3%) was offset by increases in fuel oil (+15.3%), gasoline (+9.1%) and electricity (+0.2%). Meanwhile, the food at home index fell by 0.1% and the food away from home index rose by 0.2 in September.

Outside of energy, other top contributors that rose in September included indexes for recreation (+0.5%), used cars and trucks (+0.7%), education (+0.6%), airline fares (+1.2%), medical care (+0.1%) and apparel (+0.3%). Meanwhile, the index for communication (-0.2%) was among the major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.4% in September, following a 0.3% increase last month. The index for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.3% and 0.2% over the month.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In September, the Real Rent Index fell by 0.1%.



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PCE Inflation Remains Elevated – Eye On Housing

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The Federal Reserve’s preferred inflation gauge remained elevated in August, complicating the Fed’s path to its 2% target. Core PCE held at 3.0% year-over-year for the third consecutive month. Though the reading came in lower than expected, it’s not necessarily a sign of disinflation. The Bureau of Economic Analysis updated the PCE deflator methodology to better reflect household spending patterns, which likely trimmed the year-over-year increase. The revisions were applied retroactively through the first quarter of 2021. Meanwhile, the personal saving rate dropped to the lowest level in nearly four years, as persistent inflation offset wage growth while consumer spending accelerated.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.4% in August from a year ago, unchanged from last month, according to the Bureau of Economic Analysis. The “core” PCE price index, which excludes food and energy, rose 3.0% over the past twelve months, the same increase as last month. Core PCE has remained at or above 3.0% since the start of the Iran conflict, suggesting inflation pressure persists even excluding volatile energy prices.

Consumer spending rose 0.9% in August, and real spending, adjusted to remove inflation, increased 0.6%, the largest monthly increase since March 2025.

Meanwhile, personal income rose 0.2% in August. This growth was led by increases in compensation and government social benefits. Real disposable income—income adjusted for taxes and inflation—was unchanged. On a year-over-year basis, personal income was 4.3% higher, and real (inflation-adjusted) disposable income was up 1.3%.

With spending growth outpacing income growth, the personal saving rate fell to 4.1% in August, the lowest level since November 2022. The personal saving rate has been on a downward trend since the start of this year, with the exception of July.



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With Inflation Uptick, Fed Hikes and Signals More to Come – Eye On Housing

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The Federal Reserve raised the federal funds rate by 25 basis points at the conclusion of its September policy meeting, bringing the target range to 3.75% to 4%. The decision comes amid renewed inflation concerns and an increase in long-term interest rates. Notably, the decision was unanimous 12-0 vote, reflecting a unified view to tackle renewed inflationary pressures.

With respect to economic conditions, the Federal Open Market Committee (FOMC) stated that “economic activity is expanding at a solid pace.” In fact, the Fed slightly upgraded its growth projections, and Chairman Warsh noted that the demand for capital has increased, leading to higher market interest rates. Additionally, the FOMC noted that “uncertainty remains elevated” due to “geopolitical developments,” which is a nod to current trade issues and the Iran war.

On inflation, the FOMC stated simply that “inflation remains elevated.” The Fed noted that today’s hike, which is in response to inflation rising to a 3.4% year-over-year rate, “will support a timelier return to the Committee’s two percent goal.”  Echoing recent statements from Chairman Warsh, President Trump’s pick to lead the Fed, today’s statement repeated that “the Committee will deliver price stability.” 

Today’s hike reflects a difficult policy environment. Long-term interest rates have increased in recent weeks as corporate firms issue more debt to finance technology investment and growth, while concerns persist over long-term federal budget constraints, and, most particularly in the short run, oil prices rise due to the Iran war. Together, these forces have increased financing costs for households and businesses, including home buyers and home builders.

The prior case for holding rates steady, or at least moving slowly, rested on the source of recent inflation. To the extent that higher prices reflected one-off adjustments, the Fed could potentially “look through” these increases rather than respond to each change with tighter policy. An increase in the price level does not necessarily imply a persistently higher inflation rate.

This distinction is particularly relevant for housing. While the central bank’s federal funds rate does not have a direct effect on mortgage rates, an increase in the funds rate does increase the cost of financing for builder acquisition, development and construction (AD&C) loans. Higher borrowing costs make it more difficult to finance new construction and reduce the purchasing power of prospective buyers via higher construction costs. Slower home building limits progress in addressing the housing affordability crisis, an underlying source of pressure on shelter costs and the problem of overall inflation.

Today’s Fed hike did not measurably change long-term interest rates, including the critical 10-year Treasury rate, as much of the increase was already priced into markets. The last few weeks of bond market changes suggest investors are demanding higher yields in response to inflation risks and other pressures. If higher energy prices begin to affect broader price-setting behavior and inflation expectations, waiting for conclusive evidence could leave the central bank with more work to do later. Additional constraints on oil products are a key concern whereby interest rates could move even higher.

Looking forward, the September SEP (Summary of Economic Projections) indicates a slightly stronger growth outlook relative to June. The median projection for real economic growth in 2026 is 2.3%, measured on a fourth-quarter-over-fourth-quarter basis, compared with 2.2% in June. (NAHB is forecasting 2.1% for 2026.) Growth is expected to register 2.4% in 2027 and 2.2% in 2028, with the newly added 2029 projection at 2.1%. The unemployment rate is projected to average 4.1% in the fourth quarter of 2026 and 4.1% in late 2027, suggesting tempered labor market conditions in the current “low hire, low fire” environment.

The median forecast for headline personal consumption expenditures (PCE) inflation in 2026 is 3.7%, while core PCE inflation, which excludes food and energy, is projected at 3.4%, compared with 3.3% in June. Core inflation is expected to decline to 2.5% in 2027 and 2.2% in 2028. The projections indicate a return to the Fed’s two-percent inflation objective in 2029. The process of getting to the Fed’s policy target will thus take more time given the number of supply-shocks affecting the U.S. economy. (It is worth noting that Chairman Warsh did not participate in the September SEP.)

With respect to monetary policy, the updated dot plot indicates a median federal funds rate of 4.1% at the end of 2026, implying one more rate hike in 2026 following today’s increase. The median projections for year-end 2027 and 2028 are 4.1% and 3.9%, respectively, with a 2029 projection of 3.6%. The longer-run rate estimate was revised higher to 3.2 compared to 3.1% in the June SEP.

Today’s outlook suggests an additional rate hike in December, with either flat conditions in 2027 or a combination of an additional hike and then an offsetting cut that year. These projections are conditional outlooks, rather than commitments.

There was also an important omission from today’s communications: the Fed did not discuss changes to balance sheet policy. This is relatively good news for the mortgage sector and home builders. Accelerated reductions in the Fed’s securities holdings, particularly mortgage-backed securities, would place additional upward pressure on mortgage rates.

For housing, the path of long-term rates, and the energy, fiscal and investment pressures influencing those rates, will remain critical in the months ahead.



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Inflation Persisted in August – Eye On Housing

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Inflation in August remained sticky as renewed tensions with Iran continued pushing up oil prices, keeping pressure on the Fed to consider a rate hike at its upcoming meeting. Gasoline prices returned as the largest driver of headline inflation, accounting for one-third of the monthly increase. While consumer goods prices showed signs of stabilization from earlier tariff impacts, recent trade conflicts with Canada could add to inflation pressures in coming months.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.4% in August from a year ago, following the same increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.4% over the past twelve months, following a 2.5% increase in July. The housing shelter index, which makes up a large portion of the core CPI, rose 3.0% over the year, following a 3.2% increase last month. Meanwhile, the component index for food rose by 2.7% over the year, and the energy component index increased by 16.3%.

On a monthly basis, the CPI rose by 0.4% in August (seasonally adjusted), while the “core” CPI increased by 0.3%. The price index for a broad set of energy sources increased by 2.1% in August, as declines in natural gas (-1.1%) and electricity (-0.2%) were offset by increases in fuel oil (+10.1%) and gasoline (+3.9%). Meanwhile, the food at home index remained unchanged and the food away from home index rose by 0.3 in August.

Outside of energy, other top contributors that rose in August included indexes for communication (+2.3%), lodging away from home (+2.4%), airline fares (+2.7%), education (+0.8%) and used cars and trucks (+0.4%). Meanwhile, the indexes for medical care (-0.2%) and motor vehicle insurance (-0.8%) were among the major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.3% in August, following a 0.1% increase last month. Both the index for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.2% over the month.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In August, the Real Rent Index fell by 0.1%.



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PCE Inflation Remains Sticky – Eye On Housing

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The latest report shows the Federal Reserve’s preferred inflation gauge remains sticky in July, complicating the Fed’s path to its long-term 2% target. Meanwhile, consumer spending remains resilient but is showing signs of slowing, with real consumer spending unchanged in July. Households are pulling back on spending amid persistent inflation.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.7% in July from a year ago, unchanged from last month, according to the Commerce Department’s Bureau of Economic Analysis. The “core” PCE price index, which excludes food and energy, rose 3.3% over the past twelve months. Core PCE has held at 3.3% since the start of the Iran conflict, with the exception of a three-year high of 3.5% in May. This suggests inflation pressure persists even as energy prices slightly eased.

With elevated inflation, consumer spending slowed as the cushion from larger tax refunds faded. Consumer spending rose 0.2% in July, and real spending, adjusted to remove inflation, remained flat.

Meanwhile, personal income rose 0.4% in July. This growth was led by increases in compensation, government social benefits, and personal income receipts on assets. Real disposable income—income adjusted for taxes and inflation—was up 0.4% in July. On a year-over-year basis, personal income was 3.7% higher, and real (inflation-adjusted) disposable income was up 0.5%.

With income growth outpacing spending growth, the personal saving rate edged up to 3.0% in July, the highest level since April. This marks the first monthly increase since January.



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Inflation Eased Slightly in July – Eye On Housing

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Led by declines in gasoline and diesel prices, inflation eased for the second consecutive month after reaching a three-year high in May. As energy prices moderated, shelter resumed its role as the largest driver of headline inflation, accounting for one-third of the annual increase and over two-thirds of the monthly increase. Though easing inflation and a cooling labor market reduced pressure for Fed rate hikes, renewed tensions with Iran could keep inflation elevated in coming months, complicating the Fed’s path forward.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.4% in July from a year ago, following a 3.5% increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.5% over the past twelve months, following a 2.6% increase in June. The housing shelter index, which makes up a large portion of “core” CPI, rose 3.2% over the year, following a 3.3% increase last month. Meanwhile, the component index for food rose by 3.0%, and the energy component index increased by 14.7%.

On a monthly basis, the CPI rose by 0.1% in July (seasonally adjusted), while the “core” CPI increased by 0.2%.

The price index for a broad set of energy sources decreased by 1.5% in July, as declines in gasoline (-2.9%) and fuel oil (-1.7%) were partially offset by minor increases in natural gas (+0.7%) and electricity (+0.1%). Meanwhile, food at home index decreased by 0.1% and food away from home index rose by 0.3 in July.

Outside of energy, other top contributors that rose in July included indexes for medical care (+0.4%), airline fares (+2.2%), communication (+0.6%), education (+0.5%) and recreation (+0.2%). Meanwhile, the index for motor vehicle insurance (-0.3%) was among the major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.1% in July, matching last month as the smallest monthly increase since January 2021. Both the index for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.3% over the month. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In July, the Real Rent Index was unchanged.



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PCE Inflation Eased in June – Eye On Housing

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After reaching a three-year high last month, the Federal Reserve’s preferred inflation gauge eased in June following declines in energy prices amid a temporary truce with Iran. This marked the first monthly decline in six years. However, the resumption of conflict and a rebound in oil prices have reignited inflation concerns, suggesting this relief may be reversed in the coming months. This could challenge the Fed’s commitment to its price stability mandate.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.7% in June from a year ago, following a 4.1% increase in May, according to the Commerce Department’s Bureau of Economic Analysis. That marked the slowest annual pace in three months. The “core” PCE price index, which excludes food and energy, rose 3.3% over the past twelve months, down from 3.4% last month and matching March and April levels.

Despite the elevated inflation, consumer spending remained resilient as larger tax refunds and strong stock market gains provided a cushion for household finances. Consumer spending rose 0.3% in June, and real spending, adjusted to remove inflation, increased 0.4%.

Meanwhile, personal income rose 0.2% in June. This growth was led by increases in compensation, personal income receipts on assets, and government social benefits that were partly offset by a decrease in farm proprietors’ income. Real disposable income—income adjusted for taxes and inflation—was up 0.3% in June. On a year-over-year basis, personal income was 3.9% higher, and real (inflation-adjusted) disposable income was up 0.5%.

With spending growth outpacing income growth, the personal saving rate edged down to 2.7% in June, the lowest level since July 2022, when core CPI was near its peak. The saving rate has declined every month since January 2026. With inflation eroding compensation gains, households are dipping into savings to support spending, especially amid higher energy costs from the Iran war.



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