October 31, 2023 – Wars are Increasing Inflation Rates

Economic Commentary

For months the Fed has been waging a robust war against inflation. But as we know, this is not the only war being fought. There are wars against drug addiction, poverty and even illegal immigration. And of course, the classic definition of wars being fought in Ukraine and now Israel against terrorists within the Gaza strip. Though these wars seem to be completely separate from the war on inflation, in reality they are affecting inflation significantly.

How do these wars affect inflation? Well, when Russia invaded Ukraine, the energy markets were thrown into turmoil as Russia is a major energy producer, especially within Europe. Plus, Ukraine is a major producer of agriculture products and the war contributed to skyrocketing prices of products such as wheat and sunflower oil. This does not even mention the defense goods being produced to feed this war. Russia’s military spending alone has tripled. This spending puts pressure on many other resources and even though we are not fighting in Ukraine or Israel—money and resources are being expended which contribute to inflation.

Going back to the war on inflation, even the Fed raising interest rates to halt inflation is causing inflation. How? Well, it has been said that the vast majority of inflation reported in the September Consumer Price Index was due to rising shelter costs. Higher rates cause mortgage and rent payments to rise. While the Fed was counting on home prices falling in response to higher rates, thus far they have risen this year, albeit much slower than previous years. So, there you have it—wars are contributing to inflation — even the war against inflation. And the war against inflation must be won globally. Perhaps the Fed will realize this when they meet today, and they will continue to take their foot off the pedal for now.

Weekly Interest Rate Overview

The strong economic news kept pressure on rates this past week. The first measure of economic growth for the third quarter came in at a strong 4.9%, affirming the economy’s strength. For the week ending October 26, 30-year rates rose to 7.79% from 7.63% the week before. In addition, 15-year loans increased to 7.03%. A year ago, 30-year fixed rates averaged 7.08%, almost .75% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “For the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022. Rates have risen two full percentage points in 2023 alone and, as we head into Halloween, the impacts may scare potential homebuyers. Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory.”   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

Many potential homebuyers facing affordability challenges are turning their parents and extended family into co-buyers or roommates in order to find a place they can all call home, according to a recent survey from Realtor.com and Censuswide. In addition, the report showed that recent return-to-office requirements and elevated childcare costs may also be driving home shoppers to factor family proximity and support into their purchasing plans. Of those surveyed who are planning to buy a home within the next 12 months, roughly 51% of respondents are potentially looking to their parents to help them prepare for buying a home, with nearly one third (29%) saying they’ve already moved in with their parents to help save money in preparation for buying a home and another quarter (22%) saying they would consider doing so. Similarly, one third (32%) of respondents are even cohabitating with other family members to help save enough money to buy a home, including siblings, aunts and uncles, and cousins, and another 24% would consider doing so. “The challenging market conditions this year are changing buyer behavior in significant ways, driving many more people to explore alternative living situations they may not have considered in the past,” said Danielle Hale, Chief Economist at Realtor.com. “Mortgage rates hovering at or near 7% have eroded buyers’ purchasing power at a time when the consistently low number of homes for sale has kept housing markets surprisingly competitive.” In addition to the short-term savings that living with family provides, many are planning to stay close to family even after they’ve saved up by purchasing a home near their relatives. Some 28% of respondents who are planning to buy a home in the next year are doing so in part to be closer to their family. Source: DSNews

Veros Real Estate Solutions projects home values will appreciate 2.2% over the next 12 months. The firm’s third-quarter 2023 VeroFORECAST said one issue reigns supreme in the current housing market: the scarcity of available homes for sale. “Forecasts suggest that this predicament is here to stay for the foreseeable future, stretching into months, and quite possibly, a couple of years,” said Reena Agrawal, research economist at Veros Real Estate Solutions. Agrawal noted the chief culprit behind this housing conundrum is the expectation of prolonged high mortgage rates. “This is because the Federal Reserve is likely to hold interest rates higher for longer to combat inflation and will probably increase rates further,” she said. “Adding to this supply squeeze is the high cost of construction, which places a substantial damper on the prospect of new housing stock entering the market.” But demand for housing exhibits a “surprising tenacity” despite the headwinds created by elevated interest rates, Agrawal said. “A noteworthy trend is that a full third of all home purchases transpire through all-cash transactions, underscoring the persistence of home-buying activity. Furthermore, millennials are making their mark on the housing landscape. These young buyers are not going it alone; many receive substantial financial backing from their affluent baby boomer parents. This dynamic brings an interesting twist to the market, wherein high-interest rates predominantly affect a subset of potential buyers, some of whom are exploring more cost-effective avenues, while others contemplate deferring homeownership for another time.” The report noted smaller cities are emerging as havens of affordability and tranquility. “The appeal of a more balanced lifestyle is steering individuals and families toward these urban enclaves,” the report said. “The surge in remote work has provided some people the liberty to choose their place of residence based on personal preference rather than proximity to a workplace.” Source: The Mortgage Bankers Association

Although moving patterns have shifted significantly in recent years, migration rates are down overall, and state-to-state relocation has taken off. According to a StorageCafe report, both 2021 and 2022 witnessed increased interstate moving activity compared to the rest of the decade. Research showed that roughly 7.9 million people moved to another state in 2021 and set a record with 8.2 million interstate movers in 2022. While this trend aligns with historical patterns favoring the Sunbelt region in migration preferences, it’s significantly influenced by remote work and an increased demand for more space in the post-pandemic era. U.S. Census data shows a trend towards buying larger homes, particularly in the Southern states where homes sold recently had more square footage compared to those sold in previous years. Overall, the search for more space combined with various economic factors is driving a notable surge in popularity among less-populated states. “The increased inclination toward remote work has become a significant factor in shaping current housing preferences. On the one hand, you have the aging millennials who are in prime homebuying years and seek more relaxed surroundings. For those spending more time at home, amenities such as a dedicated home office and a larger yard are increasingly desirable, which oftentimes means relocating farther away from busy urban hotspots.” In StorageCafe’s report, experts analyze which states people are moving to and what the primary drivers are that motivate them to relocate. Experts also examined several key indicators to uncover the underlying factors driving these recent migration patterns, including demographic data, incomes and unemployment, home prices and sizes in both the state of origin and the destination, as well as housing inventory,” said Doug Ressler, Business Intelligence Manager at Yardi Matrix. “Notably, Western and Southern states are competing vigorously to establish themselves as net migration hotspots, while New England is emerging as a strong contender in the relocation race.” Source: MReport