Despite Higher Inflation & Mortgage Rates, Housing Demand Remains Strong

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Annual inflation increased in November, as reported by the Bureau of Labor Statistics This Week in Real Estate. The Consumer Price Index (CPI) rose by 2.7% year-over-year. On a monthly basis, the CPI increased by 0.3%, marking the largest gain since April, following four consecutive months of 0.2% growth. Shelter costs remained the primary driver of inflation, accounting for nearly 40% of the monthly increase. However, the year-over-year change in the shelter index stayed below 5% for the third consecutive month. Housing costs rose by 4.7% compared to the previous year, the smallest annual increase since February 2022, indicating a moderation in housing inflation. Financial markets anticipate the Federal Reserve will implement a third consecutive quarter-point interest rate cut during its meeting on December 17-18. According to the CME Group’s FedWatch tool, bond markets have priced in a 99.9% probability of this rate cut following the new inflation data. The Fannie Mae Home Purchase Sentiment Index (HPSI) increased by 0.4 points in November, reaching 75. Year-over-year, the index has risen by 10.7 points, reflecting a significant increase in consumer optimism. A record-high 45% of consumers now believe mortgage rates will decline over the next year. Additionally, 23% of respondents consider it a good time to buy a home, a notable increase from 14% in November of the previous year. Overall, this metric continues to trend upward. Below are key events from the second week of December impacting our business:  
ANNUAL INFLATION RATE ACCELERATES TO 2.7% IN NOVEMBER, AS EXPECTED. Consumer prices rose at a faster annual pace in November, a reminder that inflation remains an issue both for households and policymakers. The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month, the Bureau of Labor Statistics reported Wednesday. The annual rate was 0.1 percentage point higher than October. While inflation is well off the 40-year high it saw in mid-2022, it remains above the Fed’s 2% annual target. Much of the November increase in the CPI came from shelter costs, which rose 0.3% and have been one of the most stubborn components of inflation. The BLS estimated that the shelter item, which has about a one-third weighting in the CPI calculation, accounted for about 40% of the total increase in November. The shelter index rose 4.7% on a 12-month basis in November. Read the full story here.
CONSUMER HOUSING SENTIMENT UP SIGNIFICANTLY YEAR OVER YEAR. The Fannie Mae Home Purchase Sentiment Index (HPSI) increased 0.4 points in November to 75.0, continuing its sharp upward trend over the past year as consumers appear to be acclimating to the higher mortgage rate and home price environment. Year over year, the HPSI is up 10.7 points.  “Over the past year, we have seen a significant improvement in general consumer sentiment toward the housing market, largely driven by increased optimism that mortgage rates will fall and improved perceptions of both homebuying and home-selling conditions,” said Mark Palim, Fannie Mae Senior Vice President and Chief Economist. Read the full story here.
HOUSING DEMAND RESILIENT EVEN WITH HIGHER MORTGAGE RATES. The holiday season is here, and despite higher mortgage rates last week, housing demand is displaying some festive resilience. Typically, we expect a decrease in activity with elevated rates, but a seasonal boost is helping the purchase application data over the last month. Additionally, our pending contracts are still reflecting double-digit year-over-year growth. As with most housing data, we’re currently in a seasonal volume decline, which is pretty standard this time of year. Mortgage rates picked up last week, though that hasn’t significantly impacted our pending contract data, which is showing some positive year-over-year growth when we compare it to 2022 and 2023. The weekly pending sales for last week was 304,034, an 11% increase compared to 2023 (275,022) and 10% increase compared to 2022 (277,102), respectively. The weekly data on purchase applications showed a week-to-week decline of 4%. On a year-over-year basis, the data remains positive, increasing 4%. Read the full story here.


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