Not Out Of The Woods Yet

Inflation is easing but remains at a high level, driven by increased costs for housing. This indicates further rate hikes in the coming months.

Meanwhile, the overall U.S. housing market has posted gains in Q4 of 2022 and in January 2023. However, the gains are not evenly spread, with the West taking nearly all the losses. Winners are concentrated in the South and Southwest. Find out all details in our newsletter.

Inflation Eased But Remains High, Housing Key Factor

Inflation eased for the seventh straight month in January 2023, helped by lower costs for used vehicles and offering some relief to consumers. Consumer price index (CPI) data showed that prices were +6.4% over the past 12 months, down slightly from December's annual rate of +6.5%. The 40-year high of +9.1% was in June 2022.

See chart “U.S. Inflation Rate Easing But Still High” below for details. On a month-by-month basis, however, prices were +0.5% in January compared with December's +0.1%.

Rising shelter costs were the single biggest contributor to inflation in January 2023 and in 2022, accounting for 50% of the +0.5% monthly increase in prices and 60% of the +6.4% annual inflation rate. Shelter costs rose +0.7% last month and are +7.9% from a year ago. The Fed’s rate hike has led to higher mortgage rates, making home-buying more costly. This in turn has fueled demand for rental units.

While inflation measured by the CPI has eased since mid-2022, the producer price index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, has been on the rise again. In January 2023, the PPI reached a new all-time high of 141 points, according to the U.S. Bureau of Labor Statistics. A change in the PPI often anticipates a change in the CPI.

Paired with a strong labor report in January 2023, which showed that employers added 517,000 jobs well above expectations, and the unemployment rate hit a 52-year low at 3.4%, the lowest level jobless level since May 1969. It is easy to infer that the economy remains too hot, that prices could remain elevated for quite some time.

The Fed is likely to continue hiking interest rates higher longer than anticipated to return to its stated 2% inflation target. Stock and bond markets have already priced in another three 0.25 percentage points increases at the March, May, and June Fed meetings. Even a federal funds rate of 6.5% seems likely in 2023, up from 4.5% in February 2023.

Housing Market Remains Fractured

Home prices are going up across the country, in aggregate. Some markets, however, are showing declining prices.

Single-family median home prices increased +1.3% in January 2023 and +4% in 4Q/2022 from a year ago. Prices were strongest in the Northeast in the last quarter (+5.3%), followed by the South (+4.9%). the Midwest (+4%) and the West (+2.6%), according to the National Association of Realtors (NAR).

However, some notable regional markets are declining in Q4/2022 from the prior year. Many of these regional markets are in the West, especially in California.

San Jose, CA, was the most expensive place to purchase a home in the U.S. in 4Q/2022. But that median price, $1,577,500, is -5.8% from a year ago, and prices there are already -17% from the peak $1,900,000 median in 2Q/2022, according to NAR.

San Francisco, CA had the biggest price drop in the country, year over year, last quarter, with a median of $1,230,000, -6.1% from a year ago. Prices for San Francisco homes are already -21% in the 4Q/2022 from the peak of $1,550,000 in 2Q.

Among the most expensive cities in the West that saw prices falling are Anaheim, CA, median of $1,132,000, -1.6% from a year ago; Los Angeles, CA, median $829,100, -1.3%; and Boulder, CO, median $759,500, -2.0%.

Other markets with falling prices saw big price increases during the frenzied home-buying market of the past few years. They also tend to be appealing lifestyle destinations where people moved to as remote work provided more flexibility. These include Boise, ID, where prices fell -3.4% from a year ago, and Austin, TX, where prices are down -1.3%.

Housing Market Slowdown

A slowdown in home prices is underway. According to the NAR, median home prices increased by +1.3% in January, compared to the +4% median increase in 4Q/2022 and +8.6% increase in the 3Q/2022. The price increases are smaller, with far fewer markets experiencing double-digit growth.

Homebuying fell off a cliff at the end of 2022. when mortgage rates spiked as a result of the Fed’s campaign to rein in inflation. By the end of 2022, sales of existing homes were down nearly -18% from 2021 as would-be homebuyers left the market, according to NAR. January 2023 data validates this trend. Existing-home sales waned for the twelfth consecutive month and slipped -0.7% from December and -37% from the previous year.

Typically, a drop in housing demand would mean excess supply and ultimately lead to prices coming down. But that’s not happening, broadly speaking, in the housing market, as is underlined by the price increases in 4Q/2022.

A main driver of this phenomenon is that there is a shortage of inventory due to chronic underbuilding of affordable homes in the U.S., along with homeowners who don’t want to part with the ultra-low mortgage rate they secured over the past few years.

Even with a projected reduction in home sales this year, prices are expected to remain stable in the majority of the regional housing markets due to an extremely limited supply. The NAR also published a list of the top 10 metro areas with the largest percentage gains in the fourth quarter, of which 7 metro areas are Florida and the Carolinas. See chart “Metro Areas With Largest Percentage Gain in Q4 2022” below for details.

For a detailed outlook for the year 2023 about regional home price shifts, see our newsletter “2022 Review and Outlook 2023” published in January 2023.

What Does it Mean for Investors?

The Fed will likely continue to hike interest rates, causing mortgages to remain at a high level or climb even further. In turn, housing affordability will decline further and housing sales will remain at low levels. Prices will likely remain stable across the U.S. due to the high demand, low supply situation in the housing market.

An investor can either enter the guessing game of trying to predict which markets currently present good entry opportunities and have long-term growth potential and take on a lot of risk, or you can invest in secure first trust deeds with stable returns and low risk.

At Safeguard, we offer first trust deed real estate lending options secured by actual, physical assets. Current loan-to-value ratios are very conservative and range between 50% and 70%, providing a healthy equity cushion to your investment. In addition, we offer rates between 10.5% and 12.0%, outpacing inflation and most conservative investment options.

Our team has spent the last 15 years creating wealth for our clients. Get your money working for you! You can reach out to us via this email or give us a call: 877-280-5771