October 15, 2024 – The Inflation Picture

Economic Commentary

Last week we had the latest inflation readings. The Consumer Price Index was reported to be up 0.2% monthly and 2.4% annually in September. The core readings excluding food and energy were higher. The Producer Price Index was reported unchanged for the month and up 1.8% annually, but again higher at the core level.  Overall, these readings were seen as further evidence that inflation continues to decline, but more slowly than expected. Why is this important even though the Federal Reserve has already started to lower interest rates?

The continued progress against inflation will determine how fast the Fed brings rates down. The Federal Reserve’s Open Market Committee meets in three weeks, and most are projecting a reversion to slower but steady rate decreases – i.e. .25% instead of 0.5%. However, if there is evidence that inflation continues to be stubborn, they could easily skip a decrease at the next meeting or at their December meeting. Thus, the news we received last week was unsettling in that regard.

Regarding how fast the Fed lowers interest rates, this could also have a direct impact upon inflation, especially in the housing market. Besides labor prices, the area of inflation which has been the most stubborn has been housing inflation. Higher interest rates make housing more expensive. Therefore, lower rates will help bring down housing inflation. However, if the housing market heats up quickly in response to lower rates, this could cause house prices to rise. Thus, the Fed must exercise a very delicate balancing act.

Weekly Interest Rate Overview

The Markets. Freddie Mac reported that mortgage rates rose significantly last week as the market reacted to stronger than expected economic news. 30-year fixed rates rose to 6.32% from 6.12% from the week before. In addition, 15-year loans increased to 5.41%. A year ago, 30-year fixed rates averaged 7.7%, 1.25% higher than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Following the release of a stronger-than-expected September jobs report, the 30-year fixed rate mortgage saw the largest one-week increase since April. However, the rise in rates is largely due to shifts in expectations and not the underlying economy, which has been strong for most of the year. Although higher rates make affordability more challenging, it shows the economic strength that should continue to support the recovery of the housing market.” 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

Lower mortgage rates and rising inventory are giving home buyers a window of opportunity at an unusual time of year. Lower mortgage rates have improved affordability significantly for home buyers, and competition among them could extend instead of fading away as is typical at this time of year. Mortgage rate declines have made buying a home “affordable” again at the national level (meaning monthly payments generally take less than one-third of median household income), assuming a buyer puts 20% down and before taxes and insurance are accounted for. Nationwide, the monthly payment on a typical home purchase has fallen by more than $100 since a peak in May. Lower rates also make it easier for buyers to qualify for a mortgage on more of the inventory listed in a given area, functionally increasing the choices available to them. Beyond lower costs, a number of metrics are moving in buyers’ favor. The Zillow market heat index shifted from being in favor of sellers into neutral territory in July. For the past two years, sellers held their edge nationally until October. Homes are taking longer to sell than in recent history, but shorter than in pre-pandemic times. Homes that sold in August took 20 days to go pending, two more than in July, but about six days faster than at this time of year before the pandemic. And while inventory growth has slowed, nearly 1.18 million homes are on the market, more than any month since September 2020. Lower rates could stall or slow the cooldown in housing market activity that typically takes place this time of year, because right now buyers are more likely to be motivated by lower rates than sellers are. Source: Zillow

In a traditional sense, the term “silver tsunami” refers to pent-up housing stock that older homeowners will eventually choose to sell, which would have the effect of flooding the market with new inventory. But if prior suppositions about this trend being overblown failed to convince people, new data might make things clearer. More than half (54%) of baby boomers have no intention of ever selling their homes, according to new survey data from Clever Real Estate. This cohort expects to remain in their homes for the rest of their lives, based on responses from 1,100 people born between 1946 and 1964. “There’s a wide variety of reasons homeowners made this decision,” the survey results explained. “About half say their current home fits their lifestyle needs (52%) or they prefer to age in place (47%). “The low housing expenses that come with a fully paid-off mortgage are also keeping 40% of boomer homeowners in place. Owning their house outright may also be a factor for 37% of boomer homeowners who have considered leaving their homes as an inheritance.” This also suggests that nearly 40% of baby boomers not only never plan to sell, but they also intend to pass their current home to family, barring heirs who elect to sell a property. Money does not appear to be an overwhelming driver in this decision, the results suggest. Nearly one-quarter of respondents (22%) said their emotional attachment to the home is the key reason they wish to stay put, while roughly one in five (19%) said they don’t want to give up ties to their community or the friendships they’ve built. But affordability plays a role too, with 25% of respondents saying they simply cannot afford to move to a new home. Another 16% said that staying put is the easiest option considering the cost of an assisted-living facility. “Still, almost all boomer homeowners (90%) have concerns about homeownership as they age, primarily based on growing expenses,” the results stated. “The cost of maintenance and upkeep tops the list (59%), while being able to physically take care of these tasks isn’t far behind (55%). About half (49%) worry about property tax increases, while 42% are concerned about rising utility costs.” Source: HousingWire

Young adults today are living with their parents at a rate unseen since 1940, according to a study from Apartment List, whose research team collects and analyzes U.S. rental market data. Necessity, rather than choice, has placed many families in this position, economists say. “Fewer than one-in-five young adults living at home are earning incomes that would allow them to comfortably afford local rent prices, a far lower share than in the past.” About 7% of 25- to 35-year-olds lived in their parents’ homes in 1970. That share more than doubled as of 2022 to 17%, a share last seen following the Great Depression. “The postwar economic boom and rapid buildup of America’s suburbs enabled more young people to strike out on their own,” Apartment List Senior Housing Economist Chris Salviati said. By 1960, the share of young adults living with parents declined to 8%, and remained relatively unchanged for 20 years, until the 1980s, when the trend began to reverse. The study shows that it became slightly more common for young adults to remain in their parents’ households between 1980 and 2000, and numbers rose more rapidly in the new millennium. Apartment List data shows a clear, persistent trend of curves gradually shifting up for each generation, but what is its cause? Experts cite waning housing affordability. Source: Mortgage Point