Inflation Report Provides Mixed Signals for Housing Market

The recent inflation report released on Wednesday brings mixed news for the housing industry. On one side, housing markets throughout the nation, grappling with high home prices, might soon see some relief. Conversely, those looking for the Federal Reserve to continue lowering interest rates may be left disappointed.

According to December's Consumer Price Index report from the U.S. Bureau of Labor Statistics (BLS), there was a year-over-year increase of 2.9%, along with a 0.3% rise from November. This uptick in inflation is likely to make the Federal Reserve cautious about implementing further interest rate cuts this year.

On a more positive note, core inflation, which excludes the fluctuating prices of food and energy, saw only a 0.2% increase compared to the previous month. This marks a slowdown from the 0.3% monthly increases experienced over the last four months, indicating a potential decrease in inflationary pressure.

Importantly for the housing sector, shelter costs advanced by 4.6%, which is the slowest rate of increase seen in three years. For comparison, shelter costs peaked at 8.2% in March 2023.

Lawrence Yun, Chief Economist for the National Association of Realtors, commented, “Addressing inflation will be crucial in reducing mortgage rates, which have remained stubbornly high despite the Federal Reserve making cuts to other interest rates.” Yun also noted that various private sector data suggest that rental prices might not increase due to an oversupply of available apartments in the market. He anticipates that mortgage rates may lower slightly, perhaps reaching 6.5%, just in time for the spring buying season.

However, supporters of interest rate cuts face another challenge: the job market appears to be strengthening, which is contrary to the Federal Reserve's desire for a weaker labor market as a precursor to broader economic stimulus through lower rates.

The latest job report from the BLS revealed that December added 256,000 jobs, while the unemployment rate was recorded at 4.1%, which, although down from November, represents an increase compared to the start of 2024.

Despite the generally positive trend illustrated by the December inflation report, the outlook for inflation in 2025 appears uncertain with president-elect Donald Trump assuming office soon. His campaign statements included proposals for significant tariffs on foreign goods, especially targeting countries like China, Mexico, and Canada.

Economists warn that implementing such high tariffs as Trump suggested could lead to a resurgence of inflation. However, there are indications that Trump's economic advisors might consider lower tariffs than originally proposed, favoring a gradual increase in tariff rates rather than an abrupt implementation of a blanket 20% tariff on all foreign products.

Yet, as is often the case, politicians can shift their positions once in office, so the seriousness of Trump’s promises regarding tariffs and their impact on inflation, interest rates, and the housing market remains to be seen.

Inflation, Housing, Economy