Housing Market Threatens to Make All Americans’ Lives More Expensive

A rise in housing costs contributed to a faster-than-expected acceleration of inflation in December, the U.S. Bureau of Labor Statistics said on Thursday, a jump that has implications for the mortgage sector, as it suggests that policymakers are likely to hold rates higher for longer.

The index for shelter, which includes the cost of rent and the equivalent of rent for homeowners, jumped 0.5 percent in December from the previous month and increased 6.2 percent for the year. This jump was a key reason that inflation rose 3.4 percent last month compared to 3.1 percent in November.

“The index for shelter continued to rise in December, contributing over half of the monthly all items increase,” the Bureau of Labor Statistics said.

Inflation, which at one point hit 40-year highs at 9 percent in summer 2022, prompted Federal Reserve policymakers to hike rates at their most aggressive clip since the 1980s. Rates now run from 5.25 percent to 5.5 percent—a two-decade high—and have pushed up borrowing costs for everything from home and auto loans to business investments.

Policymakers held rates at their current levels for the third month in a row at their last meeting in December. They suggested that they will look to cut rates this year to end the year at 4.6 percent, according to projections released last month.

When Will Fed Policymakers Cut Rates?

The question that the market has been wondering is when those rate cuts will begin.

Analysts said that with the consumer price index (CPI) coming in hotter than expected, it could mean that rate cuts are likely to begin later in the spring.

“The larger than expected 0.3 [percent] rise in consumer prices in December will reverse some of the more aggressive rate cut bets this year,” Michael Pearce, a lead economist at Oxford Economics, said in a note shared with Newsweek.

He suggested that the latest data points to a “bumpy path” to the 2 percent inflation target that policymakers wish to hit, suggesting it may take them a bit more time to start cutting down rates.

“We expect the first rate cut to come in May and the Fed to deliver 75 [basis points] cuts this year, less than what markets are currently pricing,” Pearce said.

Some housing economists suggested that while shelter costs came in higher in December, they were lower than a year ago—6.2 percent last month compared to 8.2 percent in March 2023—suggesting an improvement.

“Today’s inflation data highlight that progress may not be seen every month,” Danielle Hale, chief economist at realtor.com, said in a note, adding that the volatility in prices may have the Fed take its time before it can start paring down rates.

“For the housing market, this means that the significant decline in mortgage rates observed since October may have gotten ahead of the data. In fact, mortgage rates have already steadied and are likely to increase further,” she added.

Mortgage rates, which in October hit a two-decade high of 8 percent, had been declining over the last few weeks but began creeping upward again at the start of the new year.

On Thursday, the 30-year fixed rate rose to 6.66 percent from 6.62 percent from the prior week, according to data from Freddie Mac.

“Mortgage rates have not moved materially over the last three weeks and remain in the mid-six percent range, which has marginally increased homebuyer demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Other analysts suggested that inflation was trending downward but hitting that final target of 2 percent may prove challenging.

“Inflationary pressures, while generally inching lower, remain stubbornly higher than expectations as the so-called “last mile” requires more time to reach the final goal,” Quincy Krosby, chief global strategist for North-Carolina based LPL Financial, told Newsweek.

Fed policymakers will avoid rushing to cut rates until they are convinced that the battle over rising inflation was truly won, analysts said on Thursday.

“The Fed got burned by underestimating the intensity of inflation’s surge over the last few years, and they would rather overcorrect and keep rates high for longer than necessary than cut too early and allow inflation to rebound,” Bill Adams, chief economist at Dallas-based Comerica Bank, said.

Other analysts point out that “core inflation,” the metric that excludes the volatile energy and food prices, fell slightly to 3.9 percent in December compared to the 4 percent reading the previous month.

“Disinflation remains on track in the core CPI, despite the rise in the headline data,” Jamie Cox, managing partner for Harris Financial Group, said. “Shelter is the lone sticking point to an otherwise downward trend in inflation. This report will have little influence over the rate path—the Fed wasn’t going to cut in March regardless.”

One Fed policymaker on Thursday suggested there was more work to do in lowering inflation to the target rate and subsequently spurring the central bank to begin cutting rates.

“I think March is probably too early in my estimate for a rate decline because I think we need to see some more evidence,” Loretta Mester, Federal Reserve Bank of Cleveland President, told Bloomberg TV. “I think the December CPI report just shows there’s more work to do, and that work is going to take restrictive monetary policy.”