Housing Market - 9/13/22

By Chase Bonenfant

What the August 2022 CPI Numbers Mean For The Housing Market Going Forward

Overview

The Consumer Price Index (CPI) rose higher by 0.1% to 8.3% in August of 2022 when some economists expected a decrease of 0.1%. Even though, according to the US Bureau of Labor Statistics, there was a decline of 10.6% in the gasoline index, inflation continued its ascent. Gas prices are a large factor when it comes to inflation because it affects everyone at the pump, but even more important to the level of inflation is diesel prices which is used to transports and manufacture all of our goods. Diesel prices have dropped at a much further pace and are still much too high for a meaningful impact.

Food cost increases continued its climb by 0.8%, although at its slowest pace since December of 2021, and the index for food at home increased 1.1%. As everyone has noticed, the cost to eat at home from grocery store goods increases. But this has paled in comparison to the increase in energy expenditures excluding gasoline. The index for electricity saw its largest year-over-year increase since August 1981 at 15.8 percent mostly from the soaring cost of natural gas (^33% YoY) which is used to generate electricity.

All of these figures are important when forecasting the future real estate market since increased monthly living expenditures has real affects on the affordability of purchasing. Even more important, though, is the fact that the CPI numbers increased even with the current monetary tightening policies the Federal Reserve has undertaken.

What does this mean?

The Federal Reserve has taken an aggressive stance to fight inflation over the last year, increasing the Federal Funds Rate (FFR) four times, which tells banks to increase money kept on-hand rather than lending it to consumer, in turn increasing interest rates on everything from credit cards to home mortgages. The Fed has been banking on seeing the CPI numbers start a steady decline, but, it turns out the amount of cash pumped into our economy and the continued government spending are a trojan horse to their soft-landing agenda.

Jerome Powell, Chairman of the Fed, will need to continue the increase on the FFR which will further increase interest rates on everything else. Already facing a recessionary period head-on and consumers feeling the pain at all areas of their budget, there doesn’t seem to be a light at the end of the tunnel yet. The housing market has already seen quite a fast slowdown, and even large investment corporations such as BlackRock are pulling out of purchasing deals in certain markets.

Right now, with the increase in mortgage rates, an entry-level home that would be affordable for a first-time homebuyer in the San Diego County area making around $100,000/year, sticking to the 28/36 Rule, would be around a $350,000 mortgage. If you know any young person out there, the chances that they have a few hundred thousand sitting in the bank for a down payment on a $600k (hole-in-the-wall) home are slim. San Diego Counties average home price sits around $830,000.

Compare this to when mortgage rates were in the 2’s and 3’s, the buyer power that afforded was immense. A first-time homebuyer at that time would be able to afford about $250k more than they can now. Home prices still have not equalized with rates, but they are most definitely heading in that direction. Houses are sitting on the market much longer than they were, more back to the average rate pre-pandemic.

Going Forward

You can expect to see the federal reserve hike rates which will inevitably increase mortgage rates. As mortgage rates increase higher, more and more buyers will be priced out and the decline in home values will worsen to match the demand. These two figures are relative, although one may lag further behind than the other. If you’re getting ready to sell, it’ll be best to get it on the market sooner than later to capture the buyers with rates where they currently are. As the recession deepens, the pockets will recede. If you’re in the market to buy, consider non-traditional mortgages such as interest-only adjustable rate mortgages (ARMs), or if possible, personal loans from willing and able family members and friends. Also, there are ways to decrease your rates when you’re in the market to buy a home by speaking with your lender about rate buy-downs. These are upfront costs you pay called points to lower your monthly costs for a certain amount of time with the mortgage.

There are no good way to say it, but we may be in for a bit of a long-haul in this sensitive market. That being said, there are ways to make deals happen in these times. Be creative and diligent with your endeavors and your work will pay off.