This week let’s spend a little time dissecting the CPI
The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in August on a seasonally adjusted basis after being unchanged in July.
- Increases in the shelter, food, and medical care indexes were the largest of many contributors to the broad-based monthly all items increase.
- These increases were mostly offset by a 10.6-percent decline in the gasoline index. The food index continued to rise, increasing 0.8 percent over the month as the food at home index rose 0.7 percent.
- The energy index fell 5.0 percent over the month as the gasoline index declined, but the electricity and natural gas indexes increased.
- The core consumer price index, which excludes volatile food and energy prices, rose 0.6% in August from July, double July’s pace. Economists follow core inflation closely as a reflection of broad, underlying inflation.
- Stronger service-sector prices could trouble policymakers by reflecting how solid demand and growing incomes have enabled companies to continue raising prices.
- Higher than expected inflation led to a hawkish Fed who reaffirmed that he will not halt until he sees meaningful drop in inflation confirmed via data.
FED and where are rates heading
- The Fed’s Anxiety about not letting Inflation go high will derail the long-term economic prospects.
- This week Fed raised the Fed fund rate by 0.75%. The market is pricing in a terminal rate of 4.25% – $4.5% according to the fed futures market.
- Fed’s projection seems to indicate a median rate of 4.3% and a range of 4.1 –5.0% for 2022.
- This could go higher if the inflation continues to persist. There are increasing signs that inflation has peaked as commodity prices have eased.
Impact on Home Sellers
- Most sellers have refinanced at a historically low rate. Many sellers have pivoted towards renting rather than selling driven by higher rent they could collect in the current environment.
- Renter market is as resilient as it has been in the recent past.
Rate hike impact on Builders
- The increase in rates has pivoted builders to construct buy-to-rent homes. There is a great demand for rentals. The supply of homes is far lower than the demand and historical average. The time to build a home averages anywhere between 6-9 months.
- Builders were not able to meet the supply due to covid supply chain issues to start with due to COVID lockdowns As the supply chain eased they were hit by high material costs due to inflation.
Overall messaging from the FED and its impact on housing
- Near-term crash in housing unlike the financial crisis is not to be seen any time soon unless the market is hit by foreclosure.
- The rate of foreclosure will be very low as most homeowners have financed at historically lowest rates.
- Fed Chair Powell in his interviews with reporters did reiterate the fact longer term he is looking at “supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace”
- The Fed is willing to go as long as it takes to contain inflation.
Impact of rates on Capital Markets
- Dow Jones industrial average dropped 500 points touching the June 2022 lows and Nasdaq dropped roughly 200 points.
- High growth Nasdaq is eviscerated due to the front-loaded rate hikes
- Most tech companies have embarked on the journey of implementing cost-cut Measures META, GOOGL
- Stronger Dollar has already dented the earnings of many of these multinationals.
- Alarm bells have been run by noted investors – Ray Dalio, and Scott Minerd about the pain ahead for the stocks as rates continue to raise.
- Valuation have already been reset.
What does this mean for the DFW Real estate market?
- DFW real estate has been stable and slowing heading towards supply and demand normalization.
- The inventory of homes for sale is improving and is at 2.6%
- New home sales increased to 28.8% in august 2022 (Market Watch)
- There has not been a dramatic correction in the prices and prices generally have remained stable.
- The other advantage that Texas metros are enjoying is high energy prices. The oil and gas companies are some of the largest employers in Texas and Oklahoma.
- Given Putin’s use of energy as a weapon I see the energy companies and those employed tremendously benefitting in the near term.
- Net-Net DFW and its surrounding Real estate Market will be resilient in the near term.
Interest Rates trajectory
2 Year treasury rate rose as high as 4.20%
Impact on Leases and Rentals:
Most tenants are choosing to opt for 2-year leases due to the impact of inflationary pressure on the rent according to the US bureau of labor statistics
- About 9 percent of tenants had a lease term other than 12 months or month to month.
- Of these tenants, 29.9 percent had a 24-month lease
- 14.8 percent had a 13-month lease, and 12.4 percent had a 6-month lease during this period.