Monetary tightening has put a sharp brake on the rise in house prices. After soaring in 2020 and 2021, they began to fall at the start of the summer. Everything indicates that the movement will increase. Similarly, some rent indices are slowing down or even falling. Housing services account for a third of the CPI. Will the correction in the real estate sector help to moderate inflation? Yes, in significant proportions but probably not before H2 2023 because inertia effects delay the impact of rents on the CPI. In the short term, this cannot be a reason for relaxation for the Fed.
Focus US by Bruno Cavalier, Chief Economist and Fabien Bossy, Economist
Inflation has surprised on the upside in recent months in the United States. One of the main reasons is the acceleration in the price of housing services, which represents a third of the consumer price index. In Q1 2022, these prices fell by 5.2% q/q annualized, in Q2 by 6.7%, in Q3 by 7.7%. The Fed’s rate hike, quickly transmitted to mortgage rates, put a stop to the overheating of the real estate market. The confidence of developers has been collapsing since January, sales are falling, house prices began their correction this summer. A correction of around 10% at the national level in the coming year would not be an extreme scenario.
The prices of housing services follow the phase changes of the residential sector, however showing great upward and downward inertia. First, the relationship between house prices and rents is neither instantaneous nor perfect. According to the New York Fed survey, households anticipate a sharp correction in prices for the coming year, but not in rents (chart). Secondly, it is not only necessary to take into account the price of the last transactions but of the effect on the whole of the real estate stock. Ditto for the rents. As real estate is not homogeneous, the estimate is not simple (not to mention the diversity of sources (1)). the new rents too, but the CPI-shelter reacted little due to the delays (2).
It is accelerating today as the market has already turned around for more than six months. A simple model for estimating rents included in the CPI shows that the acceleration will continue in H1 2023, before a sharp slowdown (chart). In short, the US real estate crisis is surely a factor of disinflation, but its translation into the inflation figures could take several more months. Moreover, this factor alone is not sufficient to bring headline inflation down to 2%. The Fed has reason to want to continue to weigh on other parts of domestic demand.
Fr september, retail sales stagnated in nominal terms. The “control group”, which better represents the underlying trend, gained 0.4% m/m. This is a smaller gain than the rise in core CPI (+0.6% m/m), suggesting that spending on goods has continued to contract. Fr october, according to the preliminary index from the University of Michigan, household confidence has recovered again for the 4th month in a row, although it is still extremely low. One-to-one inflation expectations rebounded from 4.7% to 5.1%, confirming that current inflationary pressures remain strong. At a horizon of 5-10 years, it is in line with their long-term average (2.9%).
On the supply side, the data is mixed. Industrial activity remains on an upward slope (+0.4% m/m in september) but residential construction continues to sink. The rebound in building permits (+1.4% m/m) should not be misleading, it is due to the erratic movements of the apartment market (+7.8% after -14.7%). Individual housing starts fell for the ninth time in twelve months. The correction is likely to continue. The standard mortgage rate crossed the 7% threshold at its highest since 2000. october, the confidence of builders followed its descent into the abyss. This is the 10th monthly decline in a row (-8pts, -46 points in total). The NAHB index has rarely been so low (38pts), except in April-May 2020 in full containment, or between 2007 and 2012 during the credit purge subprime.
Monetary and fiscal policy
The information from the Beige Book has been compiled up to October 7. Two districts (NY, St.Louis) note a decline in activity, four stagnation, the other six a slight increase. Demand for labor has reduced and there are signs that recruitment difficulties are easing. Overall, the labor market continues to be described as tight. Wage gains are not slowing down.
Among the latest statements from the Fed, let us especially remember the words of Neel Kashkari (Minneapolis Federation) and James Bullard (Federation of Saint-Louis). Both have once been the most dovish members of the FOMC, but they are now the most falcon. If core inflation does not slow down, Mr. Kashkari sees no reason to stop the rise in rates in the 4.5-4.75% zone, which is now the implicit end point for futures contracts with federal funds. Mr. Bullard considers that the phase of “ front-loading“, that is to say, rate hikes well above normal, could stop early next year. Neither sees the conditions for a bearish pivot in 2023.
To be continued this week
Real GDP contracted in Q1 and Q2 2022. According to the usual definition, one would have to conclude that the American economy was in decline at that time. In fact, over this period, the national accounts recorded shocks affecting imports in Q1 and then changes in inventories in Q2, which compensated for weighing on the GDP growth rate. In the first half of the year, the US economy showed none of the characteristics of a regression, such as job losses or a rejoinder in consumer spending. Given the inflationary pressures, it was even more of an overheated economy. Because of this atypical basis of comparison, it is likely that the national accounts of the Q3 2022to be published on October 27shows a rebound in growth at the very moment when several indicators point in the direction of a slowdown in the cycle (picture). The last ” now of the Atlanta and St. Louis Feds point to an increase in real GDP of around 2 to 3% q/q at an annualized rate, a good part of which again would be due to an exceptional contribution, this time ci positive, foreign trade. The Bloomberg Consensus has a price range of 1.8% to 3%.
Also to be monitored: the confidence of purchasing managers (preliminary PMI surveys on 24), household confidence (survey conference board the 25UoM’s final investigation on 28), housing prices (the 25), sales of new homes (the 26).
FOMC members will be in a period of Blackout until November 2.