Inflation once again made headlines. As the Fed raised inflation forecasts, annual wholesale inflation hit one of the hottest levels ever. Plus, higher costs and labor issues continue to impact construction of new homes. What’s more, Initial Jobless Claims increased last week. To learn more about housing news, read on.
The Producer Price Index (PPI) rose 0.8%. Year over year, PPI rose from 6.2% to 6.6% – one of the hottest readings ever! Primarily, the reasons for rising producer inflation are owed to labor shortages. Thus, the employment situation remains challenging for many families relying on schools or childcare to open fully. Also, the availability of extended benefits continues to impact the labor force.
Fed members considered inflation at their latest Federal Open Market Committee meeting last week. However, they kept their wording the same regarding inflation. For example, they noted that “inflation has risen, largely reflecting transitory factors.” As a result, they significantly raised inflation forecasts. The Fed also left benchmark Fed Funds Rate and current pace of Mortgage-Backed Securities (MBS). With Treasury purchases unchanged, they continue to purchase at least $120 billion in MBS and Treasuries.
Rising Inflation Matters to Mortgage Bonds
Meanwhile, Housing Starts ticked up 3.6% in May. Starts on single-family homes rose to 4.2%. However, Building Permits, (a good forward-looking indicator of construction), ticked lower last month. Single-family homes authorized (but not yet begun) are up nearly 53% year over year. This points to delays due to higher costs and labor issues. Builders pointed to costs and shortages of materials as reasons for the decline in builder sentiment in June. The National Association of Home Builders Housing Market Index measures builder confidence. It decreased by 2 points from May’s revised figure of 83 to 81 in June. However, 81 demonstrates an extremely strong level of confidence. For instance, any reading above 50 signals expansion.
Wholesale Inflation Reading Hotter than Ever
- The Producer Price Index (PPI) measures wholesale inflation. It rose 0.8% in May. This exceeds the 0.6% expected. Year over year, PPI rose from 6.2% to 6.6% – among the hottest readings ever!
- Core PPI strips out volatile food and energy prices. It rose 0.7% month over month and increased from 4.1% to 4.8% year over year.
Finally, the main reasons for producer inflation relate to the shortage of labor. The employment situation remains challenging for many families relying on schools or childcare to fully open. What’s more, the availability of extended benefits plagues the labor force. Capacity utilization of factories runs at 75%. This means that, although capacity to produce exists, lack of willing workers is leading to increased prices.
Inflation surges in both the Producer and Consumer reports. Also, the Fed last week significantly raised inflation forecasts. This caused the Bond market to sell off. The Fed now sees inflation averaging 3.4% in 2021. This is up from their original estimate of 2.4%. In all, they believe that inflation will fall back to 2.1% next year.
Why does high inflation matter to housing?
Higher inflation typically drives up home loan rates. That’s because inflation is the arch enemy of interest rates. Inflation erodes the buying power of the fixed return that a mortgage holder receives. While many factors influence the markets, we keep a close eye on all the latest inflation data, and its associated impact on Mortgage Bonds. Also, we’ll stay clued into the home loan rates tied to them.
Rising Costs, Shortages of Materials and Labor Impact Construction
- Housing Starts, which measure the start of construction on homes, were up 3.6% in May. While any increase signals good news (given the high demand for homes around the country), the reading fell below expectations. More importantly, however, Housing Starts on single-family homes rose to 4.2%.
- Building Permits, a good forward-looking indicator of construction, fell 3% in May. Permits for single-family homes lowered to 1.6%.
- Single-family homes authorized (but not begun) are up nearly 53% year over year, which points to delays due to higher costs and labor issues.
- Builders cited “higher costs and declining availability for softwood lumber and other building materials” as the reason builder sentiment declined in June. The National Association of Home Builders Housing Market Index, which measures builder confidence, decreased by 2 points from May’s revised figure of 83 to 81 in June.
- All three components of the index declined by two points as well. Current sales conditions fell to 86, sales expectations for the next six months came in at 79, and buyer traffic ticked down to 71.
- While the readings with the NAHB Housing Market Index have declined in recent months, it’s important to note that 81 is still an extremely strong level of confidence and is in the 98th percentile of readings dating back to 1985. For point of reference, any reading above 50 signals expansion.
- Despite the scarcity of both labor and building materials, the high demand for homes continues to spur confidence among builders.
A Note About Rents
Recent reports show that rents continue to rise. Zillow reported that single-family rents increased by 2.3% in May alone. This is due, in large part, to lack of inventory. CoreLogic said that rents rose 5.3% year over year, the largest gain in nearly 15 years. Rents for single-family detached homes (not townhomes) increased to 7.9%, compared to a year ago. This is likely due to individuals seeking more outdoor space. Nearly half of millennials surveyed by CoreLogic and 64% of Baby Boomers said they “strongly prefer” living in a single, stand-alone home.
If you are considering listing your home for sale, now is the time. Call today to find out how you can take advantage of the housing market to get the highest possible return of investment on your home.
About SoCal Platinum Properties, Inc.
If you are interested in buying or selling property in or around San Dimas, California and the surrounding area, don’t get caught in a Catch 22 — owning two homes or none at all. We list properties and advertise them to guarantee a swift sale for maximum profit. We also assist home buyers as they hunt for, make competitive offers, and purchase residential property. Realize your dream of homeownership, reduce your house payments to free up funds for whatever purpose you see fit. We offer the following refinance options: FHA Streamline, FHA Cash Out, FHA 203k, VA Streamline, VA Cash Out, Conventional, Commercial and Jumbo loans. Lock in your low rate today (213) 709-5178.