We just got some good news on inflation, and much of it is because housing costs increases have greatly slowed. In July of 2022 the year over year increase in housing prices was an astronomical +13.9 percent. June of this year the same year over year increase was +2.8%.
40% of the price increase (inflation) that the Federal Reserve acts upon is driven by housing. It is a big deal when prices increase. It is also a big deal when housing inflation slows. It has slowed in a big way.
Why? All you need to do is look at interest rates. Rates on home mortgages have risen precipitously. From a historical low of under 3% in the early 2020’s; it is now almost 7%. A 30-year mortgage on $400,000 at 2.5% creates a payment of $1,580. A 30-year mortgage on $400,000 at 7% creates a payment of $2,661. That kind of increase will slow down purchasing decisions and decreased demand will moderate price increases. On top of that, taxes have greatly increased as well as insurance rates. Three years ago, was a much better time to make a house buying decision than today.
Demand is bound to moderate. The average family only has so much money to spend on housing. Here in Georgia, existing home sales are down 23% from last year.
We must have a roof over our heads and demand may slow; but there are still about a million reasons why people have to move, buy, and sell houses etc. We are still creating new housing units here in the U.S. Home demand will not go to 0 and home price inflation will not go negative barring a disaster like the great recession of 2008/09.
The Federal Reserve’s 2% inflation goal will be hard to get to, but that is their stated goal. I hope we can get there without double digit interest rates and a lot of bankruptcies. The fact is there are many things much worse than some inflation in housing and everything else.
Over the last 2 years we have clearly seen that the Federal Reserve’s interest rate control clearly still has an effect. As a young man I had to move to Gwinnett County in 1981. That turned out to be an awful time to move and buy a house. We ended up getting 14.5% interest on a 30-year mortgage. Not much was selling, but not much housing was being built either. Clearly you can get lucky with home purchases. Timing means everything. Our timing of this move was terrible when you consider housing cost of ownership at that time. Our mortgage payment went from $300 to over $1,200. Many of us just do not have a choice. When the boss tells you to move, you have to do it much of the time. Looking back, we were very lucky, and the location time place could not have been better for raising a family. I am sure many young families are in similar circumstances today. My word of advice to them is to hang in there and it will get better. Ultimately, there are many things much more important that money cannot buy.
What does this mean to overall inflation? It helps with that 40%. The other 60% of inflation is made up of many things. The fact that food and energy is not even counted in the official inflation rate is kind of bologna. We will feel the increase in gas prices every time we fill up. We will look on in disbelief when we see the figure at the grocery store check-out counter.
All of this will cut down eventually on our discretionary spending. Americans are spending less on almost everything they can. Newsweek ran a survey recently and only 15% of the respondents said they were not reducing spending somewhere.
Stocks markets recently have been strong. Very recently this strength has slowed. My guess it is seasonal, and by late this year, barring some unexpected disaster bulls will be in control.
Thanks, Andy McClung CFP TM
Source: Newsweek Giulia Carbonard; Realtor.com; PublicTabelau.com: macrotrends.net; Tradingeconomics.com; Bankrate.com Jim Probasco
2023 Market Results
S&P 500 +16.4%
NASDAQ Composite +31.3%
Dow Industrials +6.1%
Russell 2000 +9.2%
World ACWI +13.6%
Source Wall Street Journal 08/11/23