Inflation Rises to 7.5% Annual Rate U.S. inflation accelerated to a 7.5% annual rate in January, rising to a new four-decade high.
The January number includes a once-a-year revision that affects seasonally adjusted data for the past five years. The Labor Department also updated the list of goods included in the calculation, known as a spending basket, to reflect consumer habits in 2019 and 2020. (…)
Headline CPI: +0.6% MoM, +7.5% YoY.
Core CPI: +0.6% MoM, +6.0% YoY. (BLS)
Bank of Canada Gov. Macklem: Current Rate of Inflation ‘Too High’ Bank of Canada Gov. Tiff Macklem said Canada’s current rate of inflation “is too high” and requires a pivot in monetary policy to return increases in the consumer-price index back to the central bank’s 2% target.
(…) “Productivity growth is vital to non-inflationary growth and rising standards of living,” Macklem said, in prepared remarks of his speech to the Canadian Chamber of Commerce. “At a time when inflation is already well above our target, this is more vital than ever.” (…)
At a press conference after the speech, Macklem said the Bank of Canada won’t be on “autopilot” as it raises interest rates, and policy makers will gauge the appropriateness of policy settings “at each point.” He said that all else being equal, the less business investment there is, the higher interest rates will need to go.
The governor noted, however, that the bank won’t have a good understanding how high borrowing costs will need to rise until the process begins. “We’re going to see how the economy reacts to higher interest rates,” Macklem said. (…)
The higher inflation “is not the result of generalized excess demand in the Canadian economy,” Macklem said. “Our economy is only just now getting back to full capacity.”
Higher interest rates, however, are needed to bring inflation back to the central bank’s 2% target. Macklem sought to reassure the business community that the central bank is committed to that goal. (…)
THE HOUSING DEBATE
Gary Shilling: The Housing Party Is Starting to Wind Down Builders are ramping up supply just as a record low percentage of Americans say it’s a good time to buy a home.
(…) a survey released by Fannie Mae this week showed that the share of Americans who think it’s a good time to buy a house fell to an all-time low of 25% in January. The high probability of a Fed-precipitated recession is also a major negative for single-family housing.
The central bank doesn’t intend to touch off business downturns when it tightens credit, but in 11 of the 12 times in raised its main policy rate since the early 1950s, a recession followed. The only soft landing was in the early 1990s. The challenge of ending purchases of Treasuries and mortgage-backed securities and reducing its balance-sheet assets this time only raises the likelihood of a recession. If the Fed dumps mortgage-related securities on the market, the increased supply will reduce demand for new issues by banks and other institutional buyers, further raising borrowing costs. (…)
The median-priced house leaped from 4.2 times median household income in the first quarter of 2019 to 5.6 times median in the fourth quarter of 2021, exceeding the previous record high of 5 times during the fourth quarter of 2005 when the subprime mortgage bubble was in full swing. The National Association of Realtors’ housing affordability index dropped from 180 in the first quarter of 2021 to 151 in the third quarter.
In response, the University of Michigan’s index of buying conditions for houses plunged from 143 in January 2020 to 63 in November. The Mortgage Bankers Association index of mortgage applications dropped from 348 in January 2021 to 227 in December. (…)
As demand for single-family houses begins to weaken, supply is starting to leap. (…) The number of new houses under construction exceeds completions by the largest margin since 1984. This will increase inventories of unsold new houses. They’ve already risen from 3.5 months’ supply in October 2020 to 6.0 months in December. Rising costs for everything from lumber to copper will make these houses more expensive and harder to sell. The National Association of Realtors’ index of pending house sales in December fell 7% from a year earlier. (…)
I don’t look for a huge single-family housing price plunge as during the subprime mortgage collapse, but a decline of 15% to 20% seems likely. This would be a big shock to the many who have relied on housing as well as stock appreciation to support their spending. (…)
Please note:
- The FannieMae survey hit “an all-time low of 25% in January”. The survey actually only goes back to June 2010.
- The price to income ratio takes no account of mortgage rates and monthly payments. In Q4’05, mortgage rates were 6%+. Now: 3.5%. So the Payment-to-Income ratio, at 25.8% is up from 20% but not yet near 30% like in 2005.
- CalculatedRisk’s affordability ratio is also not flashing red yet:
- Rising rental cost are limiting options as the same FannieMae survey shows:
- Demand is not the main problem, supply is as Redfin explains:
- On a national basis, we are seeing record low inventory over the Winter.
- Inventory was down 9.5% in January month-over-month (MoM) from December, and down 25.7% year-over-year (YoY). Inventory almost always declines seasonally during the Winter, so the MoM decline is not a surprise. Last month, these markets were down 24.8% YoY, so the YoY decline in January is slightly larger than in December. This isn’t indicating a slowing market.
More from Redfin:
Home-price growth, which has been in the double digits since Summer 2020, is expected to slow to an annual rate of 7% by the end of 2022, according to a new forecast by Redfin economists. Home sales are expected to remain relatively flat throughout the year, similar to the small annual rate of change they have been posting since August due to the ongoing shortage of homes for sale. Redfin economists expect the 30-year fixed mortgage rate to continue to rise steadily to 3.9% over the course of the year.
“Even though the price of homebuying has never been higher, demand is only getting stronger,” said Redfin Deputy Chief Economist Taylor Marr. “Some of that demand may be a reflection of buyers’ urgency to get ahead of rising rates, leaving a lot of uncertainty about how strong home sales will be in 2022. Nonetheless, the ongoing supply and demand imbalance is pushing home prices up and up because there are enough eager buyers to rapidly buy up nearly every home that hits the market. By this summer, higher prices and rates may cause buyers to pull back from the market.”
For the four weeks ending January 30, pending sales fell 2%, the largest annual decline since June 2020. Sales activity continues to be stalled by a lack of supply, as 11% fewer homes were listed for sale than during the same period last year, and total active listings fell 29% to an all-time low. Listings were down 49% from the same period in 2020.
Homebuyer demand remains very strong. Pending sales were 38% higher than they were two years earlier, weeks before the pandemic began, despite there being half as many homes for sale. Just over half (51%) of homes that found a buyer spent two weeks or less on the market—the highest rate on record for January. The pace at which homes are flying off the market is quickly racing toward a new all-time high speed even as homes become more expensive than ever.
The estimated monthly mortgage payment for a typical home for sale soared 23% year over year to an all-time high of $1,877, thanks to a combination of rising mortgage rates and asking prices, which also reached a new high. This was up 26% from the same period in 2020.
- Homebuyers on a $2,000 Monthly Budget Stand to Lose $13,750 in Spending Power as Mortgage Rates Rise
(…) If mortgage interest rates were to rise to 3.9%, a homebuyer with a $2,000 monthly housing budget could afford a $382,250 home. That’s down from the $396,000 home a buyer with the same budget can afford with a 3.5% rate—roughly where mortgage rates stand today. Put another way, the monthly payment on a $382,250 home would rise $69 with the higher mortgage rate, to $2,000 from $1,931. (…)
The rise in mortgage rates so far hasn’t put a damper on intense homebuyer demand. If anything, it has kept demand strong—pending home sales were up 38% in January from the same period two years earlier. A December Redfin survey found that nearly half (47%) of house hunters would feel more urgency to buy a home if mortgage rates were to rise above 3.5%, which has now happened.
“If rates were to rise much further in a typical market, we would expect there to be a turning point: Buyers would go from feeling more urgency to buy to feeling less urgency. That’s because rates would ultimately reach a point where renting is more feasible than buying,” said Redfin Chief Economist Daryl Fairweather. “But this isn’t a typical market. Rental prices are soaring too, so instead of renting, many buyers will likely purchase more modest homes in relatively affordable places to avoid increasing their monthly budget. That means buyer demand will remain strong for at least the next month and potentially longer, even as rates and prices continue to climb.”
Meanwhile, on the other planet:
The Super-Rich Bought More Than $40 Billion in Luxury Homes Last Year Transactions on homes priced at $10 million or higher jumped 112% in 2021 to more than 2,300.
EARNINGS WATCH
We now have 316 reports in, a 78% beat rate and a +5.2% surprise factor.
Trailing EPS are now $208.84, forward: $224.97.
So far this week, 10 companies offered guidance, 2 up, 7 down.
- Amazon’s Escalating Logistics Costs In 2009, shipping and fulfillment costs amounted to 15.6 percent of net sales. By 2021, that share had risen to 32.9 percent.
