Evening Brief – 05.09.24
Is Housing Inflation Back?
Housing is one of the most interest rate sensitive sectors of the economy and one of the most cyclically important input into the business cycle. That said, one could expect the steep rise in interest rates over the last two years to have smashed the trend in housing prices.
While this has been the case, the considerable year-over-year decrease in home prices is once again accelerating. So far, the reflation has been minimal. However, even before the likelihood of interest rate cuts later this year, home prices appear to be turning higher.
After the Federal Reserve began rapidly raising interest rates in early 2022, the 30-year mortgage rate skyrocketed, more than doubling by late 2022 compared to its level prior to the start of the tightening campaign.
The year-over-year gain in house prices at the time quickly slowed, decreasing from a 20% annual increase in late 2022 to holding steady in 2023. However, in recent months, housing prices have rebounded and are now rising by more than 6% a year, according to the S&P Core-Logic US National Home Price Index.
The year-over-year change in housing is rising at a faster rate than consumer inflation, implying that housing is once again adding to the Fed’s unresolved inflation dilemma this year.
The reflation in home prices is also notable since it is rising faster than year-over-year economic growth based on nominal GDP. U.S. output increased by 5.4% in the first quarter compared to the previous year, which was slower than the rate of expansion in house prices.
“The housing market is proving more resilient to that tight policy than it generally has in the past,” notes Neel Kashkari, president of the Minneapolis Federal Reserve, in an essay published on Tuesday. “I would need to see multiple positive inflation readings suggesting that the disinflation process is on track” to favor interest rate cuts.
The central bank faces the problem of setting policy at a time when home prices remain resilient and economic growth slows. One potential warning flag is that house prices are once again rising faster than the shelter component of the consumer price index on a year-over-year basis.
“Housing is a real problem in the United States due to a huge shortage of affordable housing, and in part because of high interest rates,” US Treasury Secretary Janet Yellen tells Bloomberg News. “That said, I strongly believe — I think it is highly likely — that shelter costs, which have been pushing up inflation, will come down.”
For the time being, there is no indication that Yellen’s optimism is converting into hard data.