The Consumer Price Index for October was released This Week in Real Estate and the response was record setting. Consumer prices in October saw the smallest year-over-year increase since January and the first month below an 8% annual growth rate since February. As a result of Thursday’s CPI report, the 30-year fixed mortgage rate realized the biggest daily drop on record. The 10-year treasury yields, the world’s favorite benchmark for longer-term rates, dropped more than 0.30% from the previous day, making for the largest day-over-day drop since 2009. National Association of Realtors chief economist, Lawrence Yun, shared his 2023 forecast with attendees of its annual conference this week saying he expects homes sales to decline by 7%, while the median home price will increase by 1%. Below are a few newsworthy events from the second week of November that influence our business:
US Home Prices Won’t Experience Major Decline, Could Possibly Rise Slightly in 2023 if Mortgage Rates Remain at 7%. Amid the backdrop of high inflation, elevated mortgage rates and slowing sales activity, severely limited housing inventory will prevent large home price drops for most of the country next year, according to NAR Chief Economist Lawrence Yun. “For most parts of the country, home prices are holding steady since available inventory is extremely low,” Yun said. “Housing inventory is about a quarter of what it was in 2008,” Yun said. “Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash.” Driven by the unprecedented rate at which mortgage rates climbed in 2022 – from 3% in January to around 7% today – the downturn in the housing market has had an outsized impact on the nation’s overall economic performance, Yun explained. Yun added that signs point to mortgage rates topping out, particularly as October’s consumer price index showed inflation rising less than expected. He did, however, express concern about the spread between mortgage rates and the federal funds rate. In 2023, Yun expects home sales to decline by 7%, while the national median home price will increase by 1%, with some markets experiencing price gains and others price declines. He also projects a strong rebound for housing in 2024, with a 10% jump in home sales and a 5% increase in the national median home price.
Record Single Day Drop in Rates After Inflation Comes in Cooler. Heading into this week, we knew that Thursday’s Consumer Price Index (CPI) would be critically important. It did not disappoint. The response to Thursday’s CPI was record setting in at least one important way, and still astonishing in many others. First off, almost every CPI report has been important in 2022. No other economic report has caused more volatility for the bond market. Because bonds dictate interest rates, we can also say CPI has caused just as much volatility in the mortgage world. CPI is the king of economic data in 2022 because inflation is the dominant focus of the financial market and the Federal Reserve. The Fed sets policies intended to keep inflation at a low, stable level. Runaway inflation causes the Fed to hike interest rates in order to slow down the demand side of the economy. In the post-pandemic environment where a good amount of inflation is thought to be driven by the SUPPLY side of the economy, that’s resulted in the Fed being particularly aggressive in trying to tamp down demand. Traders and economists expected core inflation to rise at a pace of 0.5% in the current case. That would have been a victory in and of itself compared to last month’s 0.6% reading. The actual result ended up being 0.3! Simply put, this is the best argument to date that inflation is turning a corner but as we’ve said time and again, confirmation would require TWO consecutive months of similar victories. This made for the biggest day-over-day drop in 10yr yields since 2009. So, when CPI comes out MUCH lower than expected a week after Fed Chair Powell just reminded the market that the rate hike outlook would be getting even worse in December UNLESS inflation data shifted in a big way, it’s no surprise to see markets react in record-setting ways.
Inflation Shifts to Slowest Pace Since January. Consumer prices in October saw the smallest year-over-year gain since January 2022, and while still elevated, inflation experienced the first month below an 8% annual growth rate since February 2022. As inflation appears to have peaked and has started to slow, this may ease some of pressure on the Fed to maintain its aggressive monetary policy. Excluding the volatile food and energy components, the “core” CPI increased by 0.3% in October, following an increase of 0.6% in September.
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