There was welcome news as June brought a big decline in consumer and wholesale inflation. Several indexes showed home prices are appreciating nationwide, providing opportunities right now for buyers to build wealth through homeownership.  

A MEANINGFUL DECLINE IN CONSUMER INFLATION:

June’s Consumer Price Index (CPI) showed that inflation rose 0.2%, with this monthly reading coming in just below estimates. On an annual basis, CPI fell sharply from 4% in May to 3% last month, reaching its lowest level in more than two years. Core CPI, which strips out volatile food and energy prices, increased 0.2% while the annual reading declined from 5.3% to 4.8%. 

Declining costs for used cars and air fare helped inflation last month, while stubborn high shelter costs remained a key contributor. Shelter costs = rent. 

Inflation has declined sharply from the 9.1% peak seen in June 2022. It continues to make meaningful progress lower with the headline reading now all the way down to 3%. Easing inflation is welcome news as it signifies a break from price increases for some goods and services. Lower inflation historically helps both Mortgage Bonds and mortgage rates improve over time. In fact, Mortgage Bonds had a strong rally last Wednesday after this report was released. The improvement to mortgage rates was significant. Another great reason to stay in the game. Programs and price improvements can show up unexpectedly. 

The Producer Price Index (PPI),which measures inflation on the wholesale level, increased by 0.1% in June, coming in just below expectations. On an annual basis, PPI fell from a downwardly revised 0.9% to only 0.1%. This is the lowest level in almost three years. Core PPI strips out volatile food and energy prices rose by 0.1%. With the year-over-year reading dropping from 2.6% (also downwardly revised) to 2.4%. 

This latest PPI report is another encouraging sign that inflation is easing. June’s 0.1% year-over-year reading illustrates a sharp drop from last year’s 11.7% peak. PPI tends to lead the way for CPI, which suggests further good progress moving forward.

Why does this matter?

The Fed pays attention to this data. It’s been reported the Fed plans for more than one rate hike in the second half of this year. News of inflation cooling can change that. Further rate hikes will lead to a slower economy, and it takes time to feel the impact.

Initial Jobless Claims fell by 12,000 in the latest week, with 237,000 people filing for unemployment benefits for the first time. Continuing Claims rose by 11,000, with 1.729 million people still receiving benefits after filing their initial claim.

 While this latter metric is well above the low of 1.289 million seen last September, it has trended downward since April. Some people have found new employment. Others have seen their benefits expire. Do you think side gigs and changes to self-employment plays a part in this data?

While the decline in Initial Claims appears to show a strong labor market, it includes data from the week of July 4. People often avoid filing during holiday weeks. We saw a similar dynamic when Initial Claims declined in the week encompassing the Juneteenth holiday, only to see them rise the following week. Note that Continuing Claims measured the week before Independence Day, so they were unaffected by the holiday.

Why does this matter?

The unemployment rate is low. It sends a signal to the feds that the economy is doing well despite rates hikes. People are working and spending money. New jobs are being created. When this trend starts to shift, the Fed knows the rate hikes are “working” in their favor. The Feds jobs is to make sure prices are stable and people are working. The unemployment rate can get up to 5% and it would still be normal.

HOME PRICES ON THE RISE

CoreLogic’s Home Price Index showed that home prices nationwide rose for the fourth straight month, up 0.9% from April to May. Prices were also 1.4% higher when compared to May of last year. CoreLogic forecasts that home prices will rise 1% in June and 4.5% in the year going forward.

Black Knight reported strong growth in May, with home prices up 0.7% from April. Their index has seen prices rising since January at an accelerating pace. Meanwhile, Zillow’s latest Housing Market Report showed home values rose 1.4% in June. A strong gain and followed an equal 1.4% rise in May.

  Black Knight’s VP of Enterprise Research, Andy Walden, explained home values have erased the losses from the second half of 2022 and have now set a new all-time high.” There is no doubt the housing market has reignited from a home price perspective,” said Walden.

Based on the price gains reported so far this year, CoreLogic’s index is on pace for 10% appreciation in 2023. Zillow is at 9.4% and Black Knight at a 5% pace. 

Here are some facts you need to know:

• The median home price in the US is $426,056. This is only $6341 below the all time high. 

• In June, the total number of homes for sale dropped by 15% year over year. An all time low.

• More affordable markets are seeing a more significant rise in value.

• The market feels hot because homes are selling near record highs despite mortgage rates being high.

“Sellers are getting multiple offers if their home is priced well and in a desirable area, even though there aren’t a lot of buyers out there. That’s because house hunters have so few homes to choose from.”

— Redfin Chief Economist Daryl Fairweather.  

Think about the fundamentals. We have less transactions, rising home prices, low inventory and high demand. 

What could kill demand is further rate increases, and higher unemployment rates. Both are unlikely based on the data we have today.

What happens to home prices when rates drop?

Will people with low rates hold on forever? It depends on their personal needs, and as those needs change, they will sell. 

Where does the new inventory come from?

Low inventory = price stability 

Article Written and provided by Padi Goodspeed at Cross Country Mortgage