September 22, 2026 – The Inflation Picture

Economic Commentary

This is a topic that we have visited before in the past, however with the latest bond market volatility, it is an opportune time to address the subject again with the Fed acting to address the issue this past week.  When you view headlines such as the 30-year bond yields hitting their highest levels in close to 20 years, certainly going deeper is warranted. We start with this question – why are interest rates rising again? There are two main answers to this question. First, there are fears that inflation will continue into the future.  There is a term for this inflationary condition, and it is called embedded inflation.  Embedded means it is becoming a permanent or long-term part of the equation. 

Why is inflation tied to higher interest rates? The simplest example is that inflation causes money to lose value in the future.  If I lend you $100 for one year and the inflation rate is 10%, when you pay me back in one year, that $100 will only pay for $90 worth of goods. Therefore, I must charge an interest rate of 10% in order to break even.  And we will state the obvious here—banks are not in the business to break even, thus the interest rate should be higher than 10%. Obviously, these numbers are fictitious, but they make the point.

The second answer is the fact that government borrowing is soaring. Why is the level of government borrowing an issue?  We have record Federal budget deficits. Actually, mind-blowing deficits. That is what happens when you lower tax revenue and continue to spend. That is very simple math. Here we are talking about supply and demand. If the government sells more bonds to fund the deficits, they will need to promise a higher interest rate to investors if demand is strong enough.  This forces other interest rates higher as well because the government is flooding the markets with supply. These problems are not ours only as inflation and government borrowing is happening around the world.  Though the U.S. has some unique issues such as the aging of our population which is putting additional pressure on the deficits and especially the social security system.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose sharply in the past week as the Fed meeting approached. They eased the day after the Fed meeting and after the survey period closed. According to the Freddie Mac weekly survey, 30-year fixed rates rose to 6.95% last week from 6.76% the previous week. In addition, 15-year rates increased to 6.26%. A year ago, 30-year fixed rates averaged 6.26%, 0.69% lower than today. Attributed to Freddie Mac: The 30-year fixed-rate mortgage continues to fluctuate as markets assess economic data.  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

If you’ve been waiting for the housing market to get more affordable before buying a home, 2027 may not bring much relief. The latest forecasts suggest 30-year fixed mortgage rates could remain closer to 7% next year, keeping borrowing costs high for prospective buyers.  Fannie Mae and the Mortgage Bankers Association now expect rates to average 6.7% in 2027, a notable jump from recent forecasts. In other words, forecasters who had expected mortgage rates to ease now expect them to remain roughly where they are today. “Most of the recent affordability challenges have come from increased mortgage rates. Home prices have been falling on a year-over-year basis throughout 2026 at the national level,” says Joel Berner, senior economist at Realtor.com. “Behind the scenes though, inflation is the real culprit.” When inflation remains high, investors typically demand higher yields on Treasury bonds, which can keep mortgage rates higher, too. High inflation can also leave buyers with less spending power and make homes more expensive to build. For would-be buyers, that means waiting until 2027 may not make buying a home much cheaper. “Economic reality has forced even the most optimistic interest rate forecasters to project a higher rate environment than anticipated earlier this year,” says Marty Green, a residential mortgage lending attorney at Polunsky Beitel Green. The Fed’s preferred measure of inflation rose 3.7% in July from a year earlier, according to the Bureau of Economic Analysis, well above the central bank’s 2% annual target. Green points to renewed tariffs and the war in Iran as factors that could keep inflation high and make lower mortgage rates harder to forecast.  Source: CNBC

Renting a starter home remains the cheaper option in every one of the 50 largest US metro areas, but a new report suggests that advantage is quietly eroding. The national median asking rent for properties with up to two bedrooms fell to $1,695 in July. That’s a decline of 1.4% from the same period last year, according to the Realtor.com July 2026 Rent Report. It was the 36th consecutive month of annual rent decreases. Despite that persistent slide, rents remain $225, or 15.3%, above July 2019 levels, a reminder that the pandemic-era price shock has not fully unwound.  The monthly cost of buying a starter home across the same 50 metros averaged $2,553 in July, leaving renting $858 cheaper per month. A year earlier, that gap stood at $923. Starter home listing prices fell faster than rents over the past year. Buying costs dropped $89 in total, $57 of that from lower typical listing prices and $33 from a modest decline in the 30-year fixed mortgage rate, which moved from 6.72% in July 2025 to 6.54% last month. “Renters have gained meaningful financial breathing room over the last three years, and that advantage is still real in many major metros,” said Jiayi Xu, senior economist at Realtor.com. “But the savings gap is no longer moving in just one direction. Starter-home prices are falling faster than rents in many places, giving households who are ready to buy a stronger reason to stay engaged with the market.” Source: Mortgage Professional America   Editor’s Note: These comparisons do not take into account economic factors that favor purchasing such as principal reduction and tax advantages

According to the latest Realtor.com New Construction Insights Report, more than two-thirds (67.2%) of views to new-construction listings in the second quarter of 2026 came from shoppers from a different metro area than the home for sale. Realtor.com noted that the share exceeds the 65.4% of views to existing home listings coming from outside the listing metro, underscoring the outsized role of long-distance shoppers in new-home demand. According to the report, the strongest cross-metro interest is concentrated in Southern markets where new construction is often priced at or below the national median. “New construction is increasingly a destination for buyers who are willing to look beyond their current metro in search of more attainable options and a different lifestyle,” said Joel Berner, Senior Economist at Realtor.com. “The markets drawing the most distant attention are largely in the South, where buyers can often find a newly built home at a price that compares favorably with more expensive nearby and coastal metros.”  Realtor.com noted that the national median listing price for a newly built home was $450,256 in the second quarter, essentially unchanged from a year earlier, down 0.1%.  Source: MP Daily