INDICATOR: October Consumer Price Index and Existing Home Sales
KEY DATA: CPI: -0.1%; Excluding Food and Energy: +0.1%/Existing Home Sales: -3.2%; Prices (Year-over-Year): +12.8%
IN A NUTSHELL: “Inflation is tame and that is good as the last thing the housing market could use right now is a pop in mortgage rates.”
WHAT IT MEANS: Households are stretched as their incomes are stagnating but at least they are not getting battered by rising prices. Consumer prices fell slightly in October as energy costs cratered. It wasn’t just gasoline prices that were off. Oil and natural gas costs also eased and electricity prices barely moved upward. But energy was not the only category where prices went down. We saw a decline in most household-related products, clothing, new vehicles and televisions. Shockingly, medical care services costs fell. I thought the ACA was raising health costs. What do I know? If you have to travel, stick to driving as new vehicle costs eased, as did hotel prices. In contrast, all those airline mergers, which were supposed to be so consumer friendly, are doing what most economists thought they would: raise fares. But most critically, the cost of wine declined, though the cost of the whining in Washington didn’t. Even where prices rose, the gains were small, such as in food. Of course, the large drop in the closely-watched (by me) cookies category helped. Basically, except for education, consumer prices are extremely well behaved.
On the housing front, the urge to buy a different house seems to be slowing down. The National Association of Realtors reported that existing home sales moderated in October. Every region reported a fall in demand. Single-family activity dropped though condo sales picked up. Prices remain firm, rising nearly thirteen percent over the year. It didn’t matter whether you were selling a condo or a single-family dwelling, the increase was about the same. Supply remains low, which could explain some of the weakness. The percentage of sales going to first time buyers is declining and that may be due to the higher mortgage rates.
MARKETS AND FED POLICY IMPLICATIONS: Consumers love low inflation as it helps their buying power. But the overall inflation rate is decelerating and that is worrying a lot of Fed members. The Fed wants to see inflation in the two percent range but it is now closer to one percent. The core, excluding food and energy, has pretty much stabilized around 1.7%. In other words, inflation is a concern, but the issue is too low inflation, not too high inflation. That will allow or even force the Fed to keep quantitative easing going for a long time. With the monetary authorities pumping money into the financial economy, interest rates, including mortgage rates, should remain fairly stable. That will support the housing market, which seems to have hit a lull. However, as prices continue to rise, more people will climb above water and that will improve mobility and bring more homes onto the market. Limited choices have been a factor in the slowing sales.