Fannie Mae Economic Group Shines a Spotlight on what’s causing the housing market inflation problem in the country.

It is about time we started talking about housing and housing reform seriously! It will take a wave of inflation to convince the government that the housing policies they’ve long advocated for are the real cause of the problem we are suffering from. For a long time now, bad policies and zoning restrictions that do not make any sense have led us into this situation where home prices are rising at an unprecedented rate. A report by the Fannie Mae Economic Group says that the fast-rising housing prices have fueled the largest increase in inflation since the financial crisis of 2008.

THE RELATIONSHIP BETWEEN HOUSING PRICES AND INFLATION

There is a symbiotic relationship between the housing market and the inflation measures. What you need to know is that any consumer good that is limited in supply, will influence inflation either positively or negatively. In this case, the home fits perfectly in this category. There are different factors that come into play and affect the prices of homes and one of the most prominent factors is interest rates. When the interest rate is low, people are enticed to buy homes leading to increased demand. If assuming that the supply of homes remains constant and the demand increases, certainly, the prices will go up and this is exactly what is happening in the country. Therefore, we can expect inflation to rise.

Currently, home prices are up 15 percent from last year and the situation with rent is getting even worse; tripling for the first six months of 2021. And while Fannie Mae Economic Group believes that inflation acceleration could be considered temporary or transitory, pressure in all sectors of the economy will likely last into 2022 due to lagged effects from the skyrocketing prices of homes.

Consequently, this will put upward pressure on inflation that will likely last through the year.

“We now view stronger and persistent inflation as the principal risk to our forecast, though uncertainties over consumer behaviors related to reopening and COVID-19 developments remain,” Fannie Mae’s ESR Group said.

“If a stronger underlying inflation trend develops, due to expectations rising or persistent labor market tightness, there is a risk of a wage-price spiral,” the group continued. “If this occurs, we believe it will likely lead to a substantial jump in longer-term interest rates and an earlier and more aggressive pace of Fed tightening.”

It is important to note that housing makes up about one-third of the key inflation measures, with the way the housing prices have been rising steadily, they could eventually boost inflation by as much as 2 percentage points by the end of 2022, but we won’t have to wait that long to begin experiencing the effects of this rise.

According to the latest edition of the monthly Consumer Price Index released by the Bureau of Labor Statistics, the cost of shelter rose by 0.5% between May and June which shows a 2.6% rise compared with the data from last year. Cumulatively, the rise in housing prices accounted for roughly a fifth of the overall increase in inflation for the month of June.

“The outlook for rents is key,” said Torsten Slok, chief economist at Apollo Global Management. “With rents going up as the economy reopens, we will continue to see more upward pressure on overall inflation.”

Most of the financial markets have now shrugged off the rise or rather the speculation in rising of inflation, especially after the fact that the Fed and the Fannie Mae Economic Group said that the inflation is directly tied to temporary factors that are likely to fade away as the country makes a full recovery from the pandemic. Yet, we see growing tensions from investors who are more worried about the long-term growth with the emergence of deadly and more lethal variants of the Covid-19. Nonetheless, most are keen on what’s happening in the housing market. With home prices on the rise, and heightened social distancing measures plus remote working, all these led to an increased awareness of the importance of bigger spaces. That unleashed pent-up demand as the massive millennial population reaches their peak homebuying years.

The easy-money approach taken by the Fed last year drove the mortgage rates down which further fueled the demand for housing, even when younger adults sought to leave the overly crowded and high price urban centers for spacier suburbs. While the high prices prevented wouldbe homeowners from being able to afford, the resulting impact was felt in the rental market which has since seen dramatic increases in rents.

The US inflation hiked itself from 1.68% in February all the way to 5% in June. supposing that the Fed was to tighten its policies, Fannie Mae expects the results to drag on upcoming housing market growth and even stifle home sales, house prices, construction, and mortgage origination. “Our expectation is these high inflation readings now will abate,” said Jerome Powell, chairman of the Federal Reserve.

Speaking of which, home sale for existing inventory was up 45 percent in May year-over-year

according to the National Association of Realtors. The increased demand for new housing led to the typical home lasting just 17 days on the market with 89 percent of them being sold in less than a month in May. according to the group, the purchase of mortgage applications has never been this pronounced!

“This, combined with a continued lack of new listings, led us to downwardly revise our near-term forecast,” the ESR group said. “Existing home sales are now expected to approach a level in the third quarter only slightly higher than the 2019 average.”

To add to the frenzy in the housing market, there seems to be a persistent lack of ongoing labor and a persistent lack of buildable lots which in turn limits the production capacity for new homes and because many homebuilders are likely to struggle to build new units for some time, the group had to downwardly revise its near-term single-family housing forecast as well.

“We expect to refinance origination volume to be $2.3 trillion in 2021, a modest upward revision of $54 billion from last month’s forecast, as incoming application activity continued to stay at a relatively high level and interest rates remain low,” the group said. “We forecast refinance volume in 2022 to total $1.2 trillion, up from last month’s forecast, but a decline of 49 percent from 2021. Thus, we expect to refinance volume will pull back from the 2020 peak throughout our forecast horizon.”

Sources

https://www.housingwire.com/articles/fannie-mae-and-the-housing-marketsinflation-problem/ https://www.politico.com/news/2021/07/11/housing-market-inflation-bidenrecovery-499027 https://www.marketwatch.com/story/an-inflation-storm-is-coming-for-the-u-shousing-market-11623419869