A message from Edge Investment Solution's Damon Walker:
Follow us on Facebook: Edge Investment Solutions
Follow us on Instagram: Edge Investment Solutions
Follow us on Twitter: Edge Investment Solutions
Thoughts From Last Week
It will be key to see when this weakness in housing begins to translate to decelerating shelter inflation, which would allow core inflation to decrease more sharply.
Nowhere in the economy has the surge in interest rates been more important than in the housing market, where the average 30-year fixed-rate mortgage rate rose from 3.0% this time last year to 5.4% this week. As shown in the chart of the week, this, along with dramatic home price increases, has boosted the average monthly mortgage payment up $627 y/y. In response, this week’s housing data weakened and revealed a further slowdown. July housing starts fell more than expected, contracting 9.6% to a seasonally adjusted annual rate of 1.446 million, the lowest level since August 2020. Building permits (a leading indicator of housing starts) slightly beat expectations, but also fell 1.3% to 1.674 million, suggesting further weakness ahead. In addition, the NAHB’s Housing Market Index, which is designed to measure the pulse of the single-family housing market, dropped to 49 in August, marking the first dip below 50 since May 2020.
Investors have embraced the narrative that there is a “dovish Fed pivot” coming in the fall, yet this will be largely dependent on how fast inflation cools from here. While housing is important to economic growth overall, it is also critical for inflation. It will be key to see when this weakness in housing begins to translate to decelerating shelter inflation, which would allow core inflation to decrease more sharply. Shelter, accounting for a third of headline CPI, was one area of substantial inflationary pressure in the July CPI report. Shelter costs were up 0.5% during the month, likely stemming from these higher mortgage costs weighing on landlords. According to research from the Council of Economic Advisors, it has historically taken 16 months for weakness in housing to translate to lower shelter inflation, although the particular supply and demand imbalance this time around may prolong this lag.
Source: FactSet, NAHB, U.S. Census Bureau, J.P. Morgan Asset Management.