Jeff Cox of CNBC reports on April’s inflation data which shows the Consumer Price Index (CPI) increased slightly month-over-month by 0.4% to 4.9% annually. “That equated to an annual increase of 4.9%, slightly less than the 5% estimate and the lowest annual pace since April 2021. The annual rate was 5% in March.”

Source: CNBC (May 2023)

According to the Bureau of Labor Statistics (BLS), shelter was the main driver of inflation in April. In fact, the shelter index has increased 8.1% annually, accounting for over 60% of the total increase in all items, less food and energy.

Brooklee Han of HousingWire reports on the CPI data, noting that we may be at peak inflation because this was the smallest annual increase in two years. 

“April’s Consumer Price Index data is welcome news to the Federal Reserve, which is debating whether to continue hiking interest rates after its most recent 25 basis point hike last week. Especially encouraging is that housing inflation pressure in the CPI is starting to ease, with April representing the smallest one month change in over two years.”

Fannie Mae commented on the data release, concluding that:

“On one hand, core inflation was elevated in part due to a likely one-month spike in used vehicle prices; we believe this will return to a general deflationary trend soon, as wholesale prices for used cars are back on the decline. Additionally, measured shelter inflation may have finally peaked as the annual rate ticked down one-tenth to 8.1 percent in April. We expect shelter inflation to slow further throughout the year as it catches up with more timely estimates of home price and rental growth, which have both been flat to slightly declining in recent quarters.”

Finally, Orphe Divounguy of Zillow joins the conversation, reporting that despite shelter being the most significant ongoing contributor to annual inflation, it does appear to be decelerating quickly. Annual growth of the Zillow Observed Rental Index dropped to 5.3% from its 16.9 % high in February 2022. This means shelter costs should moderate further as the year progresses.

Homebuying competition

Homebuying sentiment is improving, according to Danielle Hale of Realtor.com, and that is driving buyers back into the market following a winter freeze. In April, Fannie Mae’s Home Purchase Sentiment Index (HPSI), which measures people’s attitudes toward housing, improved by 5.5 points. This was the biggest month-over-month improvement in over two years. That said, this positive sentiment has yet to translate into greater housing inventory, putting upward pressure on homebuying competition.

Jeff Tucker of Zillow reports that homebuying demand is increasing despite inventory being down significantly as sellers don’t want to let go of their 3% mortgages. There were 28% fewer new listings than in April 2022, an even steeper year-over-year drop than in March (-22.2%). This is particularly acute because we are in the typically busy spring selling season. Here is a chart showing historical new listings:

Source: Zillow (May 2023)

“All told, about half a million fewer new listings have entered the market in the first four months of 2023 than in 2019’s first four months – a deficit of 30%. Many would-be sellers don’t want to let go of their homes, on which they’re paying about 3% in mortgage interest in many cases, when they’d have to pay 6% or more on a new 30-year loan.”

Dana Anderson of Redfin reports on similar data, noting that inventory is low, meaning homes are selling much faster than usual. “New listings of homes for sale dropped 19% year over year during the four weeks ending May 7, contributing to an unseasonal monthly decline in total inventory…But despite the inventory crunch, pending sales have increased over the last week, as they typically do this time of year.”

Debt ceiling

The negotiations on the U.S. debt ceiling are well underway in Washington, D.C., and Anna Bahney of CNN reports that this could have a dramatic impact on real estate. Should the U.S. default on its debts, housing costs could increase by 22%, according to a new analysis. If a default occurs, interest rates would spike, peaking at 8.4%, and unemployment would also surge, according to the report. 

Jeff Tucker of Zillow provides data to support the negative impact on housing, noting that although there is little historical comparative data on a default, there are specific outcomes that would be likely:

• Interest rates would rise: An increase in 30-year mortgage interest rates to a peak of 8.4% in September, before declining.
• Unemployment would increase: A sharp increase in the unemployment rate starting this summer — jumping from the current level of 3.4% to a peak of 8.3% in October before gradually declining.
• Housing slowdown: Existing home sales volume would fall from a projected seasonally adjusted annualized rate (SAAR) of 4.3 million this April to 3.3 million in September – a decline of 23% in housing market activity.
• Home prices limited effect: In the debt default scenario, seasonally-adjusted home values are projected to diverge downward from the baseline forecast starting in August, decline by only about 1% from current levels through next February and end up 1% higher than today’s values at the end of 2024.

Source: Zillow (May 2023)

“Any major disruption to the economy and debt markets will have major repercussions for the housing market, chilling sales and raising borrowing costs, just when the market was beginning to stabilize and recover from the major cooldown of late 2022. Like the impact to labor markets, the housing market fallout would represent an unnecessary own-goal at an inopportune moment, when macroeconomic policy makers already have their hands full attempting to cool down inflation without tipping the economy into recession.”