Update 06/28/2025 Pt. 2: Why the Fed Must Cut Rates to Hit 2% Inflation

In Part 2 of this week’s update, Pete D’Angelo dives headfirst into the most overlooked—and potentially decisive—factor behind inflation: shelter costs. Could the very metric used to measure inflation be the bottleneck preventing it from falling further? Pete builds a compelling case that without lower interest rates, the Fed simply can't achieve its 2% target.

We break down how shelter inflation distorts CPI readings, what the data says about owners’ equivalent rent, and why the lock-in effect is sabotaging supply. Plus:
 🔹 The real-time split inside the Fed on upcoming rate cuts
 🔹 How to use the summer market shift to your advantage as a buyer or seller
 🔹 Advice for brokers and lenders navigating rate lock risks
 🔹 Builder incentives, ARMs, and what discount points really mean right now

Stay tuned for PCE data dropping today—Pete calls it a guaranteed market mover. This is the kind of deep dive that separates hype from economic reality.

Listen, learn, and level up your perspective on housing, inflation, and monetary policy in this must-hear episode of The Pulse and Perspective.

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Peter D'Angelo | NMLS: 885309 | Branch Manager | Guaranteed Rate, Inc., NMLS 2611
Peter.DAngelo@Rate.com

*All information, topics, discussion is my own personal opinion and insight, not reflective of Guaranteed Rate, Inc. May contain market information for informational purposes only, not to be used as financial advice.

Transcript

Podcast_06.26.2025 Update.Pt2

 [00:00:00] Welcome back to the Pulse and perspective. I'm your host, Pete D'Angelo. Welcome to part two. We're going to get a little controversial together today. I'm gonna make a claim that I should have made earlier when I originally had this idea last month, we're going to make a base case here for why lower interest rates are going to be required for us to see inflation reach the Federal Reserve's goal of 2%.

And we talk about it a lot. So today we're going to get into what I call the shelter inflation bottleneck. That's what we have in front of us here. I'm going to tell buyers and sellers some quick tips and ways that we can manage ourselves here into the summer market to get the most out of our experience because I believe that there will be a lot more [00:01:00] chaos and volatility and things going on.

So what I didn't cover on the last episode to update us over the past two weeks of information and of things that are obviously going to be affecting mortgage interest rates in the real estate market. Well, I didn't talk about the Fed at all because wasn't worth much talking about. The Fed did not move their interest rate.

This was expected. But when we look afterward, we did have fed chair Jerome Powell. He had to testify. In front of Congress and when he testified he did leave the door open, he didn't make any commitments to further rate cuts. He kept his narrative consistent. They're staying data dependent. They wanna see what happens with inflation.

For us to make a decision that's, you know, his words for before they make a decision on continued easing of their monetary policy, they need to see further improvement on inflation. And a stable job market. We can't forget that. [00:02:00] But when pressed, he did not close the door to a rate cut in September and we're possibly, he also did not close the door for a rate cut in July.

So we're going to see what that looks like. Most expectations right now are not for a rate cut in July, but that narrative shifts and does change. And the important thing to note right now is that the Federal Reserve is comprised of Fed members, and there is. Some dissonance among the members. There are some fed members that are in favor of two cuts this year and a cut earlier.

There's couple, one or two fed members that are in the middle, and then there's a few fed members that are staunchly opposed to a fed rate cut until they see a little bit more stability in prices, inflation cooling a little bit more and stable job market. This is indicative to us that really the market now can speculate as much as it wants, and [00:03:00] that creates more volatility.

The good news is. The volatility that we've experienced year to date here has luckily kept us within a tighter range than what we've had to palate over the past two and a half to three years. So we're in better shape now, thankfully, because we haven't been seeing the interest rates swing from, you know, 6.8% to seven point half in a matter of a month, and shock the market.

People pull their listings, buyers get outta the market and priced out. We haven't seen that here in 2025. We're almost halfway through the year now. So that's good news. That is to set the stage for the argument that I'd like to make. I had a conversation with a very good friend of mine, Phil. Shout out to you, Phil.

And I came into the office one day. I was like, Phil, I'm, I'm looking at the data and this just doesn't make sense to me. I'm like, I got the feeling that this whole conversation about inflation and people waiting for rate cuts is us chasing our tail. And it's [00:04:00] because how we're looking at the data, which is driving the decision making process and the data itself is weighted.

And what I mean by that is, well, how much it costs to live in a home is a component of inflation. That's called shelter cost. There's owner's equivalent of rent, so that means, you know, it's really based on rental. In, you know, what the rental cost is for housing in different markets throughout the country.

And then they, calculate what the equivalent is when you own a home. So when you take all that into account, the current cost of financing, I. Mortgage rates is part of that. So if the cost, to purchase a home goes up because of the financing cost, the owner's equivalent to rent now goes up and now that creates a higher shelter component.

And we talk about inflation reports, and this is, I know we're getting very markety, but this is important. I want to kind of tease this out. So I'm talking to Phil about this, right? And then I'm like, yeah, man. [00:05:00] I think we're at a point where if you look at the data. 35% of the consumer price index, which is one of the inflation measures, and that's one of the ones that's most commonly referred to.

Well, 35% of that is shelter. You mean to tell me then that there's an expectation that 65% of what comprises the prices for inflation needs to improve and get us down to 2%, but if the shelter components above that, it actually needs to. Really go into a de inflationary, it has to dis inflate so that it can accommodate because the shelter component moves slowly.

It does not move quickly. So here's some of the numbers for that. In May, we got the CPI numbers. The inflation was at 2.4% year over year core 2.8% core, again, takes out the volatile elements like food and energy, shelter, index [00:06:00] rent, plus the owner's equivalent of rent Rose 0.3% month over month and 3.9% year over year.

That contributed to 60% of the CPI for that reading. It's 35% of the waiting, but it accommodated 60% of that whole inflation reading. So it means that it's being, it's over inflation and the improvement on inflation of everything else. Durable goods, services, whatever you wanna take a look at, had accommodated that over the past 16 months.

Shelter inflation eased by 0.5%. Point five percentage points, so from 4.4% to 3.9%, which was the last reading in May. So over that time, we're not seeing inflation improve. As you [00:07:00] know, it's not cooling for shelter as quickly or moving as much as the other components. Brings me to my next point. A fed rate cut is going to be necessary for us to see the Fed reach its own goal of 2% inflation.

This is number one because I only did a 16 month look back for this, and that's the best 16 months that we can look at as far as inflation improving. There's a big drop a little bit outside of that. That's an anomaly. We, this is the environment that we've seen that's been a little bit more stable over the past 16 months, the Fed will need to actually lower interest rates to reach 2%. Otherwise, they are not going to, if we get another CPI report and shelter is yet again 50 to 60% of what that total inflation reading is. I mean, every time we see that now the bell should go off. They need to cut the rate in order for them to [00:08:00] reach their own goal.

The tight rental markets are part of the cause for this because. With no inventory to buy, people are renting the rent prices. Then they get to kind of set their own price for that, and that creates higher cost for the end, the end tenant. So a rate cut lock-in effect is going to persist because of those three to 4% interest rates that we saw prior to the pandemic.

So until we see interest rates reach a point where someone can have a palatable interest rate going from 4% up. Now another component to this is the fact that a lot of people have tapped into home equity. They've taken out second mortgages, HELOCs, second mortgages, which are closed end. They also are called equity loans.

A lot of people have done that, so that changes their equity position when they're going to buy something, and that also changes what their overall blended cost of [00:09:00] financing for their home is. So, you know, if you have a 4% interest rate on the first mortgage with a $300,000 balance, but you took out a $200,000 home equity line of credit with an interest rate of 8.5%, you can blend those two numbers together and that number's higher than 4%.

Based on that above 6%. So when you compare that, if you go buy another house, if you're below 6% or you can get there, you're making out better actually than what your current financing costs look like. That goes to show that the Federal Reserve needs to lower the interest rate to reach their own target.

So now we've talked exhaustively about the Federal Reserve, let's stay tuned and let's see more. By the way, it felt pretty vindicated when I was reading National Association of Realtors, I saw, their chief economist, Lawrence Yung, did make mention of the shelter component of inflation.

So it's good to see someone's bringing that to the attention and to the public right now. I think that's gonna be an important component to look at. Now, for you [00:10:00] as a buyer, as a prospective seller, as a lender, I'm gonna talk to my fellow lenders out there and brokers and for real estate professionals.

What are some of our key takeaways here for buyers First? Use the rising inventory to negotiate if you're in markets where that's appropriate. We're in New Jersey right now, so where I'm saying that for the market that's appropriate to start negotiating in New Jersey, just understand that if you've been shopping, the market dynamics are changing.

So your history and your experience is super valuable, but you also have to take a look at some of the more recent developments to make informed decisions about offers. Especially when you're placing offers in super desirable areas. There are some areas that are unaffected by some of these market changes and the dynamic shifts, but there are some markets that are, the value of your realtor is in that alone plus so much more.

So find [00:11:00] an excellent local realtor. They will help you navigate those dynamics. Also explore builder incentives. If you're in a market that has builders, as we mentioned, builders are starting to scale back the new permits, and there's a little bit of a drop off there. That means what is built or the builders that have stuff are probably incentivized to get rid of it.

Now before there's a bigger shift, there's not going to be a lot more inventory that they're going to create. So take advantage also if you are of the risk appetite, and you're. Open to adjustable rate mortgages as the market has now changed. Take a look at some adjustable rate mortgages.

You could have some reasonable and meaningful savings. Compared to what a 30 year fixed rate mortgage could look like. So adjustable rate mortgages keep an eye out. As a brief note on that, quite a bit more volatile. They do kind of pop up and have their moments where they're extremely attractive, and then other times not in an [00:12:00] effective way of getting the best adjustable rate.

Mortgage currently is just. Automatically, assuming you're gonna pay a discount point, having discount points as part of it is going to get you the most bang for your buck. And dollar. For dollar discount points are gonna go further on an adjustable rate mortgage for the most part than on a fixed rate mortgage.

So like I, I did this for a client, you could pay one discount point and get an interest rate from, you know, 6.7 down to 6.6 or 6.58, something like that. Or you can get a five one arm adjustable rate mortgage, pay one discount point, and go from, let's say, 6.125 to 5.625. You know that that's how big of a margin discount points are not created equal.

If you'd like to learn more, I have another video on my YouTube channel, so go check that out. That goes into discount points. Moving on to sellers and agents, the market [00:13:00] is shifting. We are in an environment now where we cannot just assume we gotta throw everything in the kitchen sink at this offer. It's going to be about being strategic.

Having the right strategy for your buyer and for the market your buyer is shopping in is going to be of paramount importance. And there's a little bit more disparity from market to market, even township to township, uh, as I'm noticing in my local market. So this could apply anywhere.

Pricing listings to the more recently sold comps is going to be. Probably your best recipe for success. It's one of those situations right now where the past two months, two to three months is more valuable than the trends of the past 12. Taking a look at the more recent developments is going to serve you and highlight unique opportunities.

So location, proximity to certain job centers, or certain amenities or activities or [00:14:00] entertainment. That's going to be very helpful. And for sellers. If you've been on the fence, this is your call. Definitely the time may have already passed. We're not sure, but at least have a conversation with a real estate professional to get their opinion on your home and let what your goals are dictate trying to play.

The market's a difficult thing, especially now. So the best advice I can give to any would be seller, is have a firm understanding of what it is that you have as a goal for your. Self for your family, for home ownership purposes, for financial budgeting purposes, and manage toward that. If you've had the thought of selling your home because you have a need, explore the options as soon as possible for lenders and brokers.

I'm going to give you some of the tips because I've been burnt a little bit here. I've been burnt. I'm gonna be honest. I had expectations of [00:15:00] this market changing a little bit more drastically over the past couple years, and I've had a lot of optimism. I'm a glass half full guy at my core, but I need to be a little more realistic.

So here's what I have. Number one, manage the rate locks accordingly. It's tricky out there. You cannot guarantee if you like it, lock it. Set the proper expectations with your clients. Secondly, educate them. Educate them on the shrinking loan sizes. Higher down payments are obviously part of the equation here to be competitive.

So from the numbers side, see what can be done to maximize their buying power based on those things. And then lastly, prepare for some incoming rate volatility within the next couple days. When you're hearing this episode on Friday, we're getting the, personal consumption expenditure, the PCE, the fed's preferred inflation gauge.

Let's see what that does. That will be a market mover. I guarantee it. Fed share. Jerome Powell literally just [00:16:00] said, we're remaining data dependent and the market's gonna work on anticipating that. Closing thoughts for everybody here. Volatility is still part of the equation. 

It's situation normal all over the place, and that is going to be the case here moving into the summer. So the best thing that you can do is just find the professionals that you know, like, and trust. Reach out to them, get their opinion, and make the best informed decision that you can. Playing the market is not appropriate.

Unless you are a real estate investor and this is your game, play that game. But if you're talking about purchasing property for yourself, for your family, playing the market isn't part of these dynamics, you're gonna have to really let your need and your budget dictate above all else. I hope you found all of this helpful and useful.

Please feel free to reach out to me if you do have any questions. If there's anything else that you'd [00:17:00] like me to cover on the show, you can reach me. At Peter dot dangelo at gmail,

you can reach me at peter dot dangelo@rate.com. You can go into the episode description on Spotify and Apple Podcast, YouTube. You can check out my information there. I would love to hear what you think and if you have anything that you would like for us to deep dive on on future episodes. Until next time, have a great weekend and take good care.