MARKET MOVING NEW THIS WEEK

The Fed is committed to their 2% target inflation rate. According to Jerome Powell, rate cuts are not an option until the Fed has concrete and consistent evidence of declining inflation. So how did we end up with a 5% chance of a rate cut this week? Core inflation is improving.

What will it take to get there?

In September, prices measured by the Consumer Price Index (CPI) went up by 0.4%. This is after they increased by 0.6% in August. Prices for things like gas, electricity, and fuel went up, while natural gas prices went down. If we don't count food and energy, which can change a lot in price, the CPI went up by 0.3% in September, just like in August. Food prices went up by 0.2%.

The biggest price increases in September were for housing and gasoline. But prices for used cars and clothes went down. Housing prices, which are a big part of the CPI, went up by 0.6% in September. This is after they went up by 0.3% in August. Prices for rent have been going up by an average of 0.5% every month for the last nine months.

Housing represents about 30% of the value of the “basket of goods” that the Bureau of Labor Statistics evaluates when calculating CPI (consumer price index).

Looking at the last year, the CPI increased by 3.7% in September, the same as in August. Without counting food and energy, the CPI went up by 4.1% over the last year, which is a bit slower than before. Food prices went up by 3.7% in the last year, and energy prices went down by 0.5%.

The NAHB compares rent inflation to overall inflation to see how they match up. This helps understand the rental housing market. In September, this special rent index went up by 0.2%. Rent takes up 11% of core CPI and Owner’s equivalent rent (represents what homeowners would rent their homes for) is 32% of core CPI.

Core inflation is the Fed’s favorite measure. Shelter is a large component. Core inflation excludes food and energy. Core PCE is down to 3.7%, the lowest since May 2021. The progress continues, and is expected to improve further as shelter’s lagging data catches up.

The good news: Inflation is improving.

The bad news: Its no longer enough, as we have a resilient job market on our hands and the risk of rising inflation is looming.

News to watch this week:

• The Bank of Japan meeting will be televised today, at 10:30 PM EST could have an impact on the bond market and the expectation is that the bond market will react negatively to this report.

• Tomorrow: Case Shiller HPI, tracks monthly change in value of single family homes in the US.

• Wednesday: Mortgage Apps, ADP Employment Report, JOLTS, Fed Meeting

• The Fed meeting starts tomorrow, 10/31 - 11/01

• Friday: BLS Jobs Report

In my opinion, any sign of weakness in these job reports would be “good” news to the Fed further emphasizing the restrictive policy is working. JOLTS is a monthly survey of U.S. job vacancies, hiring, and job separations released by the Bureau of Labor Statistics of the U.S. Department of Labor. In September, job growth was surprisingly strong. 336,000 jobs were added, which is the most since January. This was much more than the 227,000 jobs added in August. The number of jobs added in both July and August were revised higher than first reported. A lot of the job growth in September came from the leisure and hospitality sector. They added 96,000 jobs, which is more than their average over the last year. The unemployment rate stayed the same at 3.8%. There were about 6.4 million people without jobs. Expectations were that there would be 170,000 new jobs and a 3.7% unemployment rate. You can see why 336K was shockingly higher and created a reaction in the bond market, mortgage rates went up.  This is the 33rd month in a row that the US has added jobs. The job market has been strong, which helps give people the confidence to spend money and keeps the economy going.

We will be watching the job reports closing for signs of weakness.

For the first time since July 2022, there is an increase in homes listed for sale. New listings are on the rise. This small 0.3% increase happened in the four weeks up to October 22. Many homeowners are choosing to sell because they believe mortgage rates won't drop anytime soon or they're worried home prices might go down if they wait longer. Last year, the number of new listings dropped when mortgage rates went up. The initial reactions to rates jumping are always paralyzing.

Homebuyers are happy to see more homes on the market after they've been decreasing for about 18 months. However, many are still hesitant to buy. Applications for new mortgages are at their lowest in 30 years. Demand is down, but many buyers are getting pre-approved and keeping their eyes on the market. There's been a small increase in homes going under contract as well. Motivated sellers should be taking a look at how builder incentives have been driving sales.

Many realtors agree that some homeowners are selling because they're worried about decreasing house values. But others are hoping to catch a rise in demand. Good advice to sellers would be a reminder that you can’t time the market, price effectively and prepare for negotiations. Home prices are still going up in many markets, and mortgage rates remain high. Payment shock is keeping affordability concerns front and center and buyers on the sidelines.  About 7% of homes listed had their prices lowered in the last four weeks, which is the highest it's ever been.

If you’re a buyer approved and ready to place strong offers, now would be a great time to target a home that’s been on the market for 10 or more days with no offers and ask for the price reduction or credits needed to make the purchase more affordable for you. Remember, when rates drop, and they will, demand will surge and prices can rise further. Affordability is not a new issue. It shows up in the price or the payment, and the present market, both.

Is it really better to rent if you’re thinking long term? Sure, if you want a lower monthly payment and you plan to invest some portion of the difference, it is.

Benefits of Homeownership:

1. Building Equity: Over time, homeowners build equity as they pay down their mortgage and as the property appreciates in value.

2. Stability: Homeowners enjoy stability in their monthly payments (with fixed-rate mortgages) and don't face rent increases or eviction by landlords. Even when there’s a hardship, there are programs in place to help you keep your home.

3. Tax Benefits: Many homeowners can deduct mortgage interest and property taxes from their taxable income, leading to potential tax savings. The difference is incredible. When applying the income tax benefits of ownership, you can save $500 - $2000 a month in taxes and increase your take home pay. Ask your CPA for a calculation that applies to you personally with all variables considered.

4. Control Over Space: Homeowners have the freedom to customize and make improvements to their property without needing a landlord's permission. You can add an ADU and create an income producing space, or convert your garage to the studio you’ve always dreamed of having.

5. Price Appreciation: Homes often increase in value over time, potentially offering a return on investment when sold. Observe home prices and how they’ve increased over time. The average cost of a home in the US in 1995 was $128,000. The average today is $412,000.

6. No Landlord: Owning a home means not having to deal with landlords, allowing homeowners full control over their living space. Sure, you wont have someone to call when the dishwasher breaks, but you also don’t need permission to paint a room or hang a TV.

7. Long-term Cost Efficiency: While there are upfront costs, homeownership can become more cost-effective than renting in the long run, especially if rental prices rise. Take a look at the numbers below.

8. Sense of Pride: Homeownership is often viewed as a significant accomplishment, giving many a sense of pride and belonging. It feels good.

9. Community Connection: Homeowners tend to be more invested in their communities, leading to deeper social ties and civic participation. Community garage sales, babysitting, walking to school, sharing resources, and building relationships.

10. Potential for Legacy: Homes can be passed down through generations, offering a tangible asset and potentially building generational wealth. For many of us, homeownership is the first and only means to building generational wealth. I know its not getting easier to buy, which makes it more valuable than it is right now.

Yes, it will be cheaper to rent in the short-term, but you’re giving up a lot. The element of forced savings when you have a mortgage payment is why homeowners have 40 times the net worth of renters.

Make an appointment with me to illustrate the true cost of renting instead of owning in your market. Remember, interest rates wont go down to 2-3% anytime soon, if ever again. However, the current interest rates are not permanent. Make a decision that works for you, with a clear plan.