Mixed Outlook for Housing Industry in Light of Recent Inflation Report

Wednesday's inflation report provides a mixed outlook for the housing industry. On one side, markets nationwide that have struggled with high home prices might see some relief. On the other side, the hopes for the Federal Reserve to keep lowering interest rates have been dampened.

The December Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics (BLS) indicated a year-over-year increase of 2.9%, with a 0.3% rise compared to November. This uptick in inflation rates is expected to encourage the Federal Reserve to be more cautious about further interest rate cuts this year.

On a positive note, core inflation, which excludes fluctuating food and energy prices, only increased by 0.2% from the previous month. This is an improvement compared to the steady 0.3% increases observed in the previous four months, suggesting that inflationary pressures may be easing.

Particularly significant for the housing sector, shelter costs grew by 4.6%, marking the slowest rate of increase in three years. This is a major reduction from the peak rate of 8.2% recorded in March 2023.

According to Lawrence Yun, Chief Economist of the National Association of Realtors, "The reduction of inflation will be crucial in decreasing mortgage rates, which have remained stubbornly high despite the Federal Reserve cutting other interest rates." Yun further noted that various private sector data suggest no growth in apartment rents due to an excess of new units available on the market. Mortgage rates might see a slight dip, potentially reaching 6.5%, just in time for the spring home-buying season.

Another factor impacting the prospect of interest rate cuts is the strengthening labor market. The Federal Reserve is likely to be hesitant to lower rates until they observe a weakening in this area. The most recent jobs report from the BLS indicates that 256,000 jobs were added in December. While the unemployment rate decreased to 4.1% at the end of the year, this is slightly elevated compared to early 2024.

Even with encouraging news from the December inflation report, the inflation outlook for 2025 could be uncertain due to the incoming president, Donald Trump. During his campaign, he frequently discussed imposing significant tariffs on imported goods, particularly targeting nations like China, Mexico, and Canada.

Economists warn that implementing the proposed tariffs could reignite inflation. However, there are indications that Trump's economic advisors are considering much lower tariff levels than initially proposed, as well as introducing tariffs gradually rather than imposing an immediate 20% tariff on all imports.

It remains to be seen how staunchly Trump will pursue these policies and how they would affect inflation, interest rates, and the housing market overall.

inflation, housing, economy