July 19, 2022 – Inflation Reports Foreshadow Fed Meeting. The Federal Reserve’s main focus right now is the control of inflation.

Economic Commentary

Inflation Reports Foreshadow Fed Meeting. The Federal Reserve’s main focus right now is the control of inflation. Thus, the readings we saw on inflation last week will go a long way to influence the Fed’s decision and commentary. First, we had the Consumer Price Index, which indicated an increase of 1.3% on a monthly basis and 9.1% on a yearly basis. Inflation is up 5.9% for the year excluding the volatile components of food and energy. In short—a very hot report which came in higher than expected.

The Producer Price Index came in at 1.1% month-to-month and 11.3% year-to-year. Again, excluding food and energy, the numbers were 0.3% and 6.4%, respectively. The core numbers were in line with expectations, but the overall numbers exceeded forecasts. So. what do these numbers tell us? It looks like inflation is still a major concern. It is not likely that the Fed will stop in their tracks or accelerate based upon one month of data. The Fed is expected to raise rates, regardless of these numbers. They certainly might influence the magnitude of the increase. Last month’s inflation indicators certainly contributed to the Fed moving .75% instead of .50% and the same range is on the table this time around.

Speaking of inflation, certainly gas prices are in the headlines on a constant basis. The war in Ukraine is expected to support gas prices at this level for some time. However, keep in mind that the average budget of Americans contains much more important components than gas prices. For example, housing expenditures comprise a much greater percentage of their monthly budget. If house prices stabilize and mortgage rates do not rise from here, these factors could ease some inflationary pressures.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose in the past week and continued rising after the survey was released, buoyed by recent reports on inflation. For the week ending July 14, 30-year rates rose to 5.51% from 5.30% the week before. In addition, 15-year loans increased to 4.67% and the average for five-year ARMs also rose to 4.35%. A year ago, 30-year fixed rates averaged 2.88%, more than 2.50% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates are volatile as economic growth slows due to fiscal and monetary drags. With rates the highest in over a decade, home prices at escalated levels, and inflation continuing to impact consumers — affordability remains the main obstacle to homeownership for many Americans.”  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

Out-of-state applicants for rental properties increased 42% from 2020 to 2021, according to a new data analysis from TransUnion. In that same period, rental applications in rural areas increased 28%, while urban rental application volume rose just 10%. The primary driver of these trends appears to be rising housing costs and the widespread availability of remote work, which began during the COVID-19 pandemic. “With remote work firmly in the norm, we’ve seen renters actively seeking new locations that better suit their budgets and lifestyles,” said Maitri Johnson, VP of Tenant and Employment Screening at TransUnion. “While many are going out-of-state to sunnier environments, we’re also seeing a preference for rural areas and exurbs that have more space and a lower cost of living, but also a relative proximity to cities and airports.” Generally, the cross-state migration patterns show more people leaving the Rust Belt and Northeast in favor of the Southern Atlantic and Mountain states, as well as Arizona and Texas. Overall occupancy of U.S. rentals reached a record 98% in January 2022. This may have been driven in part by an influx of homeowners who capitalized on their home equity by selling while housing prices were at an all-time high, and renting until valuations come back down. When looking at rental applications from 2020-2021, there was a 37% increase in applicants who had sold their home within the past year, and a 16% increase among applicants with an outstanding mortgage. Source: DSNews

Homeowners’ insurance premiums have climbed by 34% in some states, according to a new study by QuoteWizard, a site operated by LendingTree. What’s more, increases in home prices and building material costs may have made many homeowners underinsured. The cost of rebuilding a home is about $36,000 more now than in 2020, the LendingTree study finds. “The last two years have been a tumultuous time in nearly every aspect of life,” the QuoteWizard study says. “This is also true for homeowners insurance. There’s no way to tell exactly how many of the nation’s 85 million homeowners are currently underinsured.” But the study urges homeowners to check their policies because rising home prices and building material costs, as well as inflation, may mean owners need to recalculate the amount of coverage needed for their home. Overall, home insurance premiums are up 2% nationwide. Homeowners may find that shopping around for homeowners insurance can make a big difference. The QuoteWizard study found that, depending on the insurance carrier, the same home insurance policy could vary by up to $2,000. Source: QuoteWizard

The median age of owner-occupied homes is 39 years, according to the latest data from the 2019 American Community Survey. Compared to a median age of 31 years in 2005, the U.S. owner-occupied housing stock is aging gradually. The residential construction continues to fall behind in the number of new homes built especially after the Great Recession. This aging housing stock signals a growing remodeling market, as old structures normally need to add new amenities, or repair/replace old components. Rising home prices also encourage homeowners to spend more on home improvement. Moreover, the number of owner households has been rising since the third quarter of 2016. This indicates a strong rising demand for new construction over the long run, as current owner-occupied housing stock is older. New construction added nearly 5.4 million units to the national stock from 2010 to 2019, accounting for only 7% of owner-occupied housing stock in 2019. Owner-occupied homes constructed between 2000 and 2009 make up 15% of the housing stock. But more than half of the owner-occupied homes were built before 1980, with around 38% built before 1970. Due to modest gains of housing construction, the share of new construction built within the past 9 years declined greatly, from 15% in 2006 to only 7% in 2019. Meanwhile, the share of housing stock built 50 years ago or earlier increased significantly from 30% in 2009 to 37% in 2019. Source: National Association of Home Builders