August 26, 2025 – The Threat of Stagflation

Economic Commentary

Judging by the jobs numbers for the past three months, the markets are calling for a rate decrease by the Federal Reserve at their next meeting in the middle of next month. Certainly, long-term rates have been falling as a reaction to the weakening job situation and in anticipation of the Fed’s next move. When the economy adds fewer jobs, consumers spend less and wage growth eases, which means that inflation should ease at the same time.  This should give the Fed more wiggle room to ease interest rates.

The one wild card is the implementation of significant tariffs. For example, the National Association of Home Builders has indicated that higher tariffs on Canadian lumber is likely to raise the cost of a new home. Higher costs are directly translated into higher inflation.  Is it possible to have rising inflation at the same time that the economy slows down?  The answer is yes, and this condition is called “stagflation.”  It is not very common in our history. 

If the Federal Reserve lowers interest rates while inflation is rising, then long-term interest rates such as mortgage rates are not likely to ease as much – if at all. Keep in mind that the effect of the implementation of tariffs upon inflation is not a certainty. There are plenty of other intervening factors. But the threat of stagflation is one that the Fed will keep their eye on. Generally, a slower growth economy should be good news for interest rates as long as we don’t have stagflation and/or fall into a recession. Thus, let’s hope for a healthy balance of slow growth and lower interest rates.

Weekly Interest Rate Overview

The Markets. Mortgage rates were stable in the past week as the markets continued to weigh recent data showing a slower job market, but also an uptick in inflation. Though they did drop on Friday after Fed Chair Powell’s speech. According to the Freddie Mac weekly survey, 30-year fixed rates remained at 6.58% last week. In addition, 15-year loans decreased to 5.69%. A year ago, 30-year fixed rates averaged 6.46%, slightly lower than today. Attributed to Freddie Mac: “The 30-year fixed-rate mortgage remained flat this week. Over the summer, rates have come down and purchase applications are outpacing 2024, though a number of homebuyers continue waiting on the sideline for rates to further decrease.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

U.S. home price growth remained below 2% in June, indicating a continued market slowdown, according to Cotality. The firm’s Home Price Index said year-over-year price growth dipped to 1.7% in June, “well below the rate of inflation and [a signal] that real prices may be becoming slightly more affordable.” The report said housing markets in the Sun Belt have seen particularly noticeable declines, while the Midwest and the Northeast are seeing seasonal price gains that align with pre-pandemic trends. “The Northeast has continued recording strong price growth as compared to the rest of the country,” it noted.  Cotality Chief Economist Selma Hepp said slowing price growth and increased for-sale inventories are gradually improving affordability, which has recently been at its lowest levels in more than 30 years. “These changes are creating new opportunities for potential homebuyers who were previously unable to enter the market due to high prices,” she added. “But the extent to which buyers can enter the market is influenced by the stability of the labor market and the absence of major layoffs.” Though the housing market is seeing slowing price increases, prices are still rising. But price growth is now less than the rate of inflation, which means that relative prices are inching closer to affordability and have laid the foundation for a buyers’ market going forward, the report noted.   Source: The Mortgage Bankers Association

A report from Realtor.com has found that while proposals to unlock federal land for housing development may offer localized relief, they fall short of delivering a national solution to the nation’s housing crisis. The report found it would take 10 million acres of land to build four million homes, and the geography of federal holdings limits their utility in addressing the areas most in need. “The U.S. faces an estimated shortage of 3.8 million homes, which is a shortfall that has built up over more than a decade and continues to push home prices out of reach for many Americans,” said Realtor.com Chief Economist Danielle Hale. “Opening up federal land for housing development may generate incremental supply in parts of the West, but it’s not a silver bullet. The most severe shortages exist in places like the Northeast, where developable federal land is virtually nonexistent. As a result, we’ve also got to make better use of the land we already have. That will require meaningful changes to zoning and land use policies to alleviate the housing affordability crisis, especially in high-demand markets.” Roughly 640 million acres of land are federally owned—nearly one-quarter of the U.S. landmass. However, the bulk of it is located in Alaska and the Western U.S., managed by agencies like the Bureau of Land Management (BLM). While states like Nevada, Arizona, and Montana contain significant federal holdings, many of these areas either already have sufficient housing supply or lack the infrastructure, jobs and population density to support major new developments. By contrast, densely populated metros in the Northeast—where the housing shortage is most acute—have little or no federal land available.  Source: Realtor.com

According to a recent Redfin research, some 8% of U.S. homes have increased in value by more than $500,000, and more than one in four (25.7%) have increased by at least $250,000. These are the maximum and minimum numbers of homeowners who may profit from the removal of the capital gains tax on home sales. The typical gain for properties whose value has increased by at least $250,000 is $384,606, which translates to a potential tax burden of $20,104 (assuming a 15% tax rate). The median gain for residences with a value increase of at least $500,000 is $712,986, which translates into a possible tax liability of $31,948. This is based on a comparison between the most recent sale price and the current Redfin Estimate for properties in the U.S. A high-level estimate of who could profit from a modification to the capital gains tax regulations governing property sales is given by the analysis. However, please be aware that each homeowner’s situation is different and that tax laws are complicated. “A lot of baby boomers say they never plan to sell their homes—but that mindset could shift if capital gains are taken off the table,” said Daryl Fairweather, Chief Economist at Redfin. “With the financial barrier removed, more may decide to sell and either downsize or relocate, potentially freeing up housing inventory and putting downwards pressure on home prices.”  Since the average American home has increased in value by $144,543 since it was last bought, its owners would not be subject to capital gains tax if they sold it today. This is due to the fact that, as of right now, property sellers who have been in their residence for at least two of the previous five years are eligible to deduct up to $250,000 in capital gains from their taxable income if they are filing alone, or up to $500,000 if they are filing jointly with a spouse. According to the IRS, most persons pay no more than 15% in capital gains tax, which can range from 0% to 20% based on income.  Source: Mortgage Point