June 18, 2024 – The Fed and Inflation

Economic Commentary

Last week we had a meeting of the Federal Reserve Board’s Open Market Committee and the release of the latest inflation data. Curious about the direction of interest rates? These two events represent bellwethers in this regard. We are looking to the Fed for signals as to when they might take their foot off the high interest rate pedal. And the Fed is looking closely at the inflation data for signs of progress which would enable them to ease up.

How did these inflation reports come in? First the consumer price index (CPI) was released, and it showed no increase month-over-month and 3.3% year-over-year. At the core level excluding food and energy, these numbers were 0.2% and 3.4%, respectively. The next day the producer price index was released and showed similar positive progress against inflation. Overall, these reports represented good news, though the Fed was cautious in their statement after their meeting this past week.

Now we must point out that these reports are not the only ones the Fed is watching. For example, the previous week the employment report featured a release on wage inflation. And the last week in May we had the personal consumption expenditures price index (PCE). But the CPI is considered the “headline” report. When the Fed met last week, they did not make a move on interest rates, as expected. And they talked about needing to see more progress against inflation – also expected. So, there you have it – these inflation reports are the key to seeing lower interest rates. Did we see progress? The answer is yes, but not enough for the Fed to declare victory.

Weekly Interest Rate Overview

The Markets. According to the Freddie Mac weekly survey, mortgage rates continued to ease last week. The positive inflation news released as the survey period ended increased the chances that this trend may continue, despite hawkish statements by the Fed following their meeting.   30-year fixed rates eased to 6.95% from 6.99% the week before. In addition, 15-year loans decreased to 6.17%. A year ago, 30-year fixed rates averaged 6.69%, 0.26% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued to fall back this week as incoming data suggests the economy is cooling to a more sustainable level of growth. Top-line inflation numbers were flat but shelter inflation, which measures rent and homeownership costs, increased showing that housing affordability continues to be an ongoing impediment for buyers on the house hunt.”   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

For several years, a persistent and historic lack of supply has restrained the housing market, but a recent uptick in inventory is poised to boost sales activity as the spring home-buying season peaks. Our Existing-Home Sales Outlook Report ‘nowcasts’ existing-home sales based on the historical relationship between sales, demographic trends, house-buying power, and the prevailing financial and economic conditions. Based on our nowcast, we expect existing-home sales to rise, but remain modestly lower than the actual annual pace of sales one year ago. With mortgage rates hovering near 7 percent, the bulk of existing homeowners face a financial disincentive to sell their home – what’s known as the rate lock-in effect. The lock-in effect has moderated modestly since mortgage rates peaked in October 2023 but will continue to limit market potential until rates either decline sufficiently to free a substantial number of homeowners or remain elevated long enough that a significant portion of borrowers lock into these higher rates. The good news is that, despite the lock-in effect, more homeowners are choosing to list their homes for sale than a year ago. According to data from Zillow, new listings in April increased 16 percent compared to the same month last year. While this figure is still 22 percent below the average number of new listings recorded in April during the years 2018, 2019, 2021, and 2022 – excluding 2020 due to peak pandemic conditions – the progress is a welcome development. More inventory typically prompts more sales, but what is motivating sellers to sell? While the majority of homeowners remain rate locked-in, sellers have un-anchored their expectations from the pandemic-low mortgage rates. Additionally, high levels of home equity could mitigate the impact of the rate lock-in effect. Homeowners have gained quite a bit of equity in their homes alongside growing house prices since the beginning of the pandemic.  For some of those equity-rich homeowners, moving and taking on a higher interest rate isn’t a huge deal, especially if they’re moving to a more affordable home or market. Finally, an existing homeowner may choose to sell for lifestyle reasons, even if it means losing their low mortgage rate. Higher inventory levels offer more choices for buyers and potential sellers alike, boosting market activity as participants find more options suited to their needs. Source: First American

Thrivent’s 2024 Boomerang Kids Survey revealed that nearly half of the parents polled (46%) have had their adult children “boomerang” back home to live with them at some point. Some 50% blame the rising expense of rent and housing. This increase represents a significant increase from the 35% who answered the same last year. “This is a wakeup call that’s gone unanswered,” says Chaz Black, Thrivent financial advisor. “More young adults returning home underscores the enormous—and growing—financial pressures they’re facing after graduation.” Other data that demonstrates the spectrum of implications, from delaying milestones to risking their financial destiny include:

• Drowning in debt: Many young adults are delaying financial priorities because of student loan debt, like buying a home (39%), saving for retirement (34%) or building emergency savings (36%). Additionally, 28% of young adults with student loans say they’re currently living paycheck to paycheck, and only 22% say their first job helped them pay down their debt.
• Parents feel the pinch: With adult children living at home, parents deprioritize their own financial needs. For example, 38% say they are struggling to pay off debt (up from 23% from last year) and 37% find it harder to save for long-term goals like retirement or housing, a considerable jump from 16% last year.
• Not making the grade: Among parents who have an adult child currently living with them, more than half don’t feel confident their child is ready to be financially independent: 55% would give their kid a C grade or lower on financial readiness and 11% would give an F. Source: Mortgage Point