Inflation Still Hot. Will Rates Drop this Year?

March CPI Report: Inflation Higher then Expected

The latest Consumer Price Index (CPI) report for March came in hotter than expected. The report revealed a 0.4% increase in overall inflation for the month, exceeding estimates of 0.3%. Year over year, inflation rose from 3.2% to 3.5%, surpassing the anticipated 3.4%. These numbers create unwanted inflationary pressures, possibly pushing out Fed rate cuts until later this year.

Housing Factors are Driving Inflation

Shelter costs, which account for a substantial 45% of the core index, were a significant factor in this upward trend. Rising by 0.4%, shelter costs remained elevated at a 5.7% increase year over year. Specifically, rents experienced a comparable rise of 0.4% for the month, contributing to the overall inflationary pressures in the housing sector. While there was a slight deceleration from the previous report’s 5.8% increase, the 5.7% year-over-year growth in rents underscores the ongoing challenges faced by renters.

A recent report by Apartment List offers insights into the trajectory of shelter CPI, suggesting a gradual decline in the coming months. According to their analysis, if current trends persist, shelter CPI is expected to dip below 3.5% by the end of 2024, aligning with pre-pandemic levels. This forecast may provide some relief amidst concerns over escalating inflationary pressures due to housing.

The Mortgage Bankers Association (MBA) provided further context on the economic landscape, revealing a mixed picture in the housing market. Purchase application volume saw a decline of 5% in the past week, with a notable 23% drop year over year. In contrast, refinances experienced a 10% increase in the same week, marking a 4% uptick from last year. However, the rise in interest rates to 7% last week, representing a 0.75% increase from the previous year, poses challenges for prospective homebuyers and homeowners alike.

Labor Market Performance

In tandem with the inflationary indicators, the Bureau of Labor Statistics (BLS) reported robust job creation figures for March. With 303,000 jobs added during the month, the labor market demonstrated considerable strength, surpassing expectations of 200,000 new jobs. The strength of the job market adds to the inflationary pressure.

What can real estate professionals do in this higher interest rate market?

It’s hard to complain about a stronger-than-expected economy, but unsustainable inflationary pressures are simply not good for the long term. As policymakers navigate these challenges, proactive measures may be necessary to mitigate the impact of inflation on consumers while fostering sustainable economic growth. Unfortunately, higher interest rates are carrying much of the burden to curtail inflation, so we may not see a reprieve from the Fed in terms of lower rates as soon as we hoped.

As real estate and mortgage lending professionals, our clients need us more than ever. This new environment of higher interest rates, coupled with rising household debt and a continuing need to buy, sell, relocate, downsize, etc, requires professional consulting. Our role is no longer limited to a transaction, and that’s good for you and our industry. As consumers look for more value from our services, financial planning and consulting related to their largest financial commitment provides an opportunity for those who look beyond the transaction.

Speak to your Intercap loan officer about our real estate coaching program, financial consulting appointments, and other high-value services that the two of you can offer your shared clients. Just because rates are higher does not mean real estate and mortgage lending services are not needed. On the contrary, the demand is greater for those who have something real to offer. Understanding blended rates, debt consolidation, rate buydowns, and down payment assistance options are ways to help buyers not only overcome obstacles, but take advantage of what this market has to offer to those who are in the know.

Sources:

• www.bls.gov/news.release/empsit.nr0.htm
• www.apartmentlist.com/research/rent-cpi-remains-elevated-even-as-rents-for-new-leases-dip
• www.mba.org/news-and-research/research-and-economics/single-family-research/weekly-applications-survey