Inflation slowed more rapidly than expected in November, increasing the likelihood of the Federal Reserve slowing down the pace of interest rate hikes. It is very good news for the housing market, which has suffered greatly from the effects of rate hikes over the last nine months.
The Consumer Price Index rose 0.1% in November from October and 7.1% year over year, according to the Bureau of Labor Statistics. The CPI rose by 7.7% from 12 months ago in October and economists expected price growth in November to post 0.3% month over month and 7.3% on an annual basis.
While food prices jumped 12% and energy costs rose 13.1% from the same period last year, central bankers don’t typically watch those numbers closely as they are volatile and don’t reflect the underlying strength of the economy. Excluding food and energy prices, the so-called core CPI rose 0.2% from the previous month and 6% year-over-year.
Used cars and truck price growth were down 3.3% from a year ago, suggesting that supply-chain issues may be easing. Services inflation, which tends to move in correlation with rising wages, still remains strong, partly due to rapid increases in rent, which rose 7.9% year-over-year.
“The shelter component of CPI continues to be a key driver of overall inflation as lower home prices and moderating rent growth is not yet being fully reflected in the data and most likely won’t become a tailwind until early in 2023,” Al Otero, portfolio manager at Armada ETF Advisors.
While it’s too early to call for a Fed “pivot” with annual inflation still at 7.1%, markets are forward-looking and will begin to price in an ebbing of the rate cycle before it actually occurs, Otero added.
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The central bank raised interest rates at the fastest pace in decades in 2022, moving them between 3.75% and 4% from near-zero earlier this year. While the Fed hiked interest rates by 75 basis points for four consecutive times, the central bank – which will announce its next action on Wednesday – could slow down the pace of the interest rate hike given that the CPI came in lower than anticipated. Housing market observers are watching closely.
The Fed should pause its rate hikes but won’t stop this month, Logan Mohtashami, lead analyst at HousingWire, said.
“The Federal Reserve has made sure to let the market know how many rate hikes are left and the speed,” Mohtashami said. “With today’s CPI data, that will seal the deal of 0.50% rate hike as the Fed has told the markets that the pace of rate hikes will slow.”
Overall inflation has been declining on a year-over-year basis after hitting a peak of 9.1% in June, suggesting that price growth has been slowing since the Fed’s fight to tame inflation – and beat back the housing market in the process – began in March.
Defying aggressive action from the Fed is the strong labor market. Employers added 263,000 jobs in November, with the unemployment rate holding steady at 3.7%.
Mortgage rates have been declining after hitting its recent peak about a month ago at 7.16%. On Monday, the 30-year fixed mortgage rate was 6.44% on Monday, according to the HousingWire Mortgage Rates Center.
“The spread between mortgage rates and the 10-year Treasury yield narrowed by 13 basis points during the month to 283 basis points in a sign that investors and lenders may be seeking to accelerate the impact of falling rates,” Scott Happ, president of Optimal Blue, a division of Black Knight, said.
However, lower rates haven’t been enough to spur the housing market, which also suffers from the contradiction of falling demand and low inventory, as well as falling prices that haven’t fallen enough to get buyers out of bed.
Rate lock dollar volume declined 21.5% in November from the previous month, the lowest level since February 2019, Black Knight’s data showed. Overall lock volumes are now down 39% over the past three months and down by 68% compared to last year’s level, underscoring how far the housing market has fallen since the heights of 2021.
“Stalled inventory and rates nearly twice what they were a year ago are combining to negate the benefits of recent home price and rate declines from an affordability perspective,” Happ said.