CPI Hits Expectations- Rates Finally Drop 👌

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Rates ended LOWER compared to last week, and volatility was HIGH. Rates are in the low-7 range for most loan types without paying discount points. Paying discount points can get you in high 6’s.

CPI Hits Expectations- Rates Finally Drop 👌

On Wednesday morning, the latest CPI (inflation) data for April was released. The headline CPI met expectations at 3.4%, and the Core CPI (excluding food and energy) also aligned with forecasts at 3.6%.

After weeks of steady increases, we finally saw mortgage rates dip slightly last week. Rates are now in the low 7% range for most loan types without paying discount points, and you can get into the high 6% range if you do.

This break came after four months of the market beating expectations. Investors are now feeling more confident about potential rate cuts later this year, leading to a fall in mortgage rates from their recent 2024 highs.

Despite this, inflation remains a concern. We've seen inflation above 3% for 37 months straight. Supercore CPI (excluding food, energy, and housing) hit 4.9%, its highest in a year, driven by car insurance inflation (+22.6%), transportation inflation (+11.2%), and hospital service inflation (+7.7%).

An interesting development is happening with shelter inflation, which makes up about 40% of Core CPI. Shelter inflation has been pulling back, dropping from a peak of 8.2% in March 2023 to 5.5% now. This lagging indicator might continue to decrease as more rental agreements renew and if home prices soften further, significantly impacting CPI.

Shelter inflation lags significantly behind real-time housing and rent data. This is because only 1/12th of rental agreements renew each month. As more of these contracts are updated and if home prices continue to decline, we can expect a further decrease in shelter inflation, which will have a notable impact on the overall CPI.

US Loosing Millions of Potential Homebuyers

We're always looking for insights into the housing market's future, and a recent article from ResiClub highlighted a major shift: the US population is growing slower than expected.

The US Census Bureau had projected the population to reach 351 million by 2022, but the actual number was 333 million, 18 million fewer than expected in 2008. The main driver of this slowdown is lower fertility rates. By 2050, the US population is now projected to be 361 million, down from the 2008 projection of 439 million. The chart below highlights the forecast variances from 2008, 2012, 2017 and 2023.

That chart is a bit chilling. Over 75M fewer US citizens expected in 2050.

For the pro-active market forecasters, this significant decrease in population growth could lead to slower housing demand in the future, particularly for new builds. Home prices might stabilize or even decline, and we may see shifts in housing preferences for our baby boomers, and create a shift towards senior living communities, apartments, or condos. Additionally, there could be a geographic shift towards more urban areas vs. rural regions.

Economically, this slowdown could impact construction, real estate, mortgage services, and other related industries.

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