KBRA Financial Intelligence

Housing Market Developments Set to Drive Inflation Trends

By KFI Staff

Mortgage Origination Slows Further, Delinquencies Steady

The average rate on new 30-year mortgages tracked by Freddie Mac had fallen 26 basis points (bps) throughout 1Q 2025, but that easing has since been almost entirely erased by a rebound to 6.85% in the most recent week of data. The aggregated mortgage volume held by U.S. banks increased just 1.6% year-over-year (YoY) in 1Q 2025—equivalent to approximately $45.8 billion—matching the smallest annual increase in the past three years. Net mortgage growth lagged total loan volume growth for a third consecutive quarter.

Among nearly 4,400 U.S. commercial and savings banks reporting residential mortgage holdings in 1Q 2025, the average residential mortgage delinquency rate was 1.66%. Although that was virtually unchanged from 4Q 2024, the average delinquency rate remains above the five-year moving average (MA) for a second straight quarter. Further, the current average exceeds the five-year MA by the widest margin in over 12 years. Mortgage delinquency rates remain significantly below pre-COVID levels, but the persistent ongoing slowdown in new mortgage originations and acquisitions could eventually contribute to a resurgence of delinquency in future quarters. KBRA Financial Intelligence (KFI) has previously noted that delinquency risk tends to increase as the average loan age within a portfolio rises.

Relatively weak residential mortgage financing activity among banks follows a similar softness in home sales. A recent release from the National Association of Realtors (NAR) showed that the pace of existing home sales fell to a seven-month low of four million in April, just 75% of what the NAR considers “normal” or pre-pandemic levels. That said, the association also states that “pent-up housing demand continues to grow,” and could be released by any meaningful fall in mortgage rates.

KFI has noted that although the average 30-year mortgage rate has remained above 6% for over two years, most U.S. homeowners locked in loans at significantly lower rates. According to the Federal Housing Finance Agency’s (FHFA) National Mortgage Database, the average rate on outstanding mortgage loans was just 4.3% in 4Q 2024—the most recently available data. This gap between current market rates and the lower rates held by existing homeowners presents a major hurdle to home sales growth. Many potential sellers are reluctant to give up their favorable rates for higher ones tied to new purchases, further constraining housing market activity.

Housing’s Role in Key Inflation Gauges

However, the prospect of falling rates and strongly rebounding home sales may prove to be a difficult balance to achieve due to the inflationary implications of a potential home sale resurgence. Shelter prices play a significant role in various price gauges, particularly the Consumer Price Index (CPI). Per the Bureau of Labor Statistics, the CPI’s shelter component—primarily composed of owners’ equivalent rent (OER) and rent of primary residences—represents more than one-third of the total index’s weighting. For example, April’s 0.3% month-over-month (MoM) increase in the shelter component accounted for more than one-half of the headline CPI’s monthly gain, illustrating shelter’s significant influence on inflation. Although shelter inflation peaked at a lower rate than total consumer price inflation in 2022, it has proven to be much stickier.

While broader inflation, as measured by CPI, has fallen from its recent peak of 9% to 2.3%, shelter inflation remains at a rate of roughly 4%. Although the YoY change in headline CPI has surpassed the Federal Reserve’s 2% inflation target across every month since February 2021, removing the shelter component shifts annual inflation below that 2% threshold across 18 of the past 24 months of data. Further, while the personal consumption expenditures (PCE) price index (the Fed’s preferred index) includes more goods and services and uses a different methodology for calculating the relative importance of each constituent, the weighting of housing in nominal dollars can be calculated at almost 16%.

Further shelter disinflation within the CPI is possible, given the softening in home sales and the latest data from the FHFA showing home purchase prices declining for the first time in two and a half years. Conversely, stronger home sales could reignite more aggressive increases in home prices and OER which, in turn, may have a strong inflationary impact on the CPI. Although the shelter component is known to have a lagging reaction to price changes due to infrequent data collection and irregular lease renewal, the lag only typically comprises a period of several months. This is not a long period of time in terms of the Fed’s monetary policy setting, which looks out several years in advance.

If stronger home price growth were to feed hotter inflation, it could stymie the Fed rate cut projections, which have already been on pause for the entirety of 2025. With the yield curve already inverted, it is uncertain how much further the average 30-year mortgage rate can decline without Fed rate cuts (or at least market expectations of cuts) bringing down short-term rates helping to pull down longer-term yields. Despite the Fed still forecasting rate cuts in 2025 and 2026, the timing and pace of easing is increasingly uncertain. KFI will host a webinar on the state of monetary policy and its impact on bank lending throughout the remainder of the year on June 17 (register here).

A scenario where home sales and mortgage financing stages a rebound amid rising rates is not impossible if those higher rates are spurred on by expectations of stronger economic growth. Interestingly, the annual pace of new home sales increased to a three-year high of 743,000 in April, diverging from the trajectory of existing home sales. Newly constructed homes represented less than 16% of total home sales according to the latest month of data, but this move could imply that banks’ residential construction lending has passed through the worst of a multiyear downturn.

May 2025 M&A

Greenwood, Mississippi-based Bank of Commerce (KFI Score: B) announced in a May 1 press release that the $983 million bank will acquire $154 million Lexington, Mississippi-based Holmes County Bank (KFI Score: B) for an undisclosed price. The deal is expected to close in 4Q 2025.

Worthington, Minnesota-based Worthington Federal Savings Bank (KFI Score: A-) announced in a May 1 press release that the $105 million bank will merge with $28 million Jackson, Minnesota-based Jackson Federal Savings and Loan Association (KFI Score: B-) for an undisclosed price. The deal is expected to close in 3Q 2025.

Idaho Falls, Idaho-based Frontier Credit Union (KFI Score: B) announced in a May 1 press release that the $698 million credit union will acquire $75 million Butte, Montana-based First Citizens Bank of Butte (KFI Score: B-) for an undisclosed price. The expected close date of the deal was not disclosed.

Omaha, Nebraska-based First National Bank of Omaha (KFI Score: B) announced in a May 1 press release that the $31.8 billion bank will acquire $2.2 billion Kansas City, Missouri-based Country Club Bank (KFI Score: B) for an undisclosed price. The deal is expected to close before year-end 2025.

Oklahoma City, Oklahoma-based Chickasaw Community Bank (KFI Score: B) announced in a May 2 press release that the $459 million bank will acquire $101 million Roff, Oklahoma-based Oklahoma Heritage Bank (KFI Score: C-) for an undisclosed price. The deal is expected to close in 3Q 2025.

Fort Pierre, South Dakota-based First National Bank (KFI Score: B) announced in a May 16 press release that the $1.7 billion bank will acquire $324 million Cheyenne, Wyoming-based Wyoming Bank & Trust (KFI Score: A-) for an undisclosed price. The deal is expected to close in 3Q 2025.

Easthampton, Massachusetts-based Hometown Financial Group, Inc., the parent company of $2 billion BankESB (KFI Score: D), $3 billion North Shore Bank (KFI Score: B), and $1.6 billion bankHometown (KFI Score: B) announced in a May 20 press release that the holding company will acquire Quincy, Massachusetts-based CFSB Bancorp, Inc. (NASDAQ: CFSB), the parent company of $366 million Colonial Federal Savings Bank (KFI Score: A) in an all-cash transaction valued at $44 million. The deal is expected to close in 4Q 2025.

Stuart, Florida-based Seacoast Banking Corporation of Florida (NASDAQ: SBCF) (KFI Score: B+) announced in a May 29 press release that the $15.7 billion lender will buy $4.1 billion The Villages, Florida-based Villages Bancorporation, Inc. (KFI Score: A-) and its bank subsidiary, Citizens First Bank (KFI Score: B+), in a cash and stock transaction valued at $711 million. The deal is expected to close in 4Q 2025.

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