Inflation, Home Prices On The Rise

John Smith
January 1, 2023
5 min read

The last week of April showered us with a plethora of economic data across a wide spectrum of the economy.

Consumer Inflation Creeping Up

Personal Consumption Expenditures (PCE), the Fed’s favored measure of inflation, showed that headline inflation was up 0.5% in March, which was hotter than the 0.3% expected. Year over year the index increased from 1.5% to 2.3%, which was also much higher than the 1.9% expected.

Core PCE, which strips out food and energy prices and is the Fed's real focus, was up 0.4%, also higher than the consensus of 0.3%. Year over year, Core PCE increased from 1.4% to 1.8%.

Part of the reason for the increase in the annual comparisons is that readings for the more current months are replacing the readings from 2020 when much of the economy was shut down due to the pandemic. It's expected that April's inflation reading will also move higher. In fact, if we saw another 0.4% increase for April Core PCE, which will be reported next month, it will be replacing a -0.4% reading from last year. This would cause the year over year Core reading to go to 2.6%!

The Fed has repeatedly stated that they expect rising inflation will be transitory, which they once again reiterated following their meeting last week.

This is important to note because higher inflation typically drives home loan rates higher. Inflation is the arch enemy of interest rates, since it erodes the buying power of the fixed return that a mortgage holder receives. While many factors influence the markets, I will be keeping a close eye on all the latest inflation data, and its impact on Mortgage Bonds and the home loan rates tied to them.

Also of note, Personal Income was up 21% in March while Personal Spending was up 4.2%. Expect next month’s numbers to spike higher due to the $1.9 trillion stimulus bill that was passed at the end of March. Savings and investment rates are higher, which is part of the reason why Stock prices are up.

Low Inventory Helping Home Prices Appreciate

Case Shiller Home Price Index February 2021

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 12% year over year nationwide in February. This is a 15-year high and even stronger than the 11.2% appreciation seen in the previous report for January.

The 20-city index rose from 11.1% to 11.9% year over year, with almost all of the cities showing strong gains. Phoenix (+17.4%), San Diego (+17%), and Seattle (+15.4%) once again reported the highest annual gains among the 20 cities.

FHFA House Price Index February 2021

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Note that while you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply is tightest and demand is strongest.

Appreciation was also strong for these homes, as prices rose 0.9% from January to February and they are up 12.2% when compared to February of 2020. This is little changed from the 12% annual appreciation in the previous report.

Record low levels of supply continue to help prices appreciate, as demand for homes remains strong across the country. At these levels of appreciation, someone who bought a $300,000 home last year would have gained $36,000 in appreciation.

Pending Home Sales March 2021


Also of note, Pending Home Sales, which measure signed contracts on existing homes, increased by 1.9% in March, snapping two consecutive months of declines. The real story here once again remains low inventory, which is down 28% year over year, making the increase in March even more impressive.


Jobless Claims Remain Elevated

Jobless Claims Week of April 24, 2021

The number of people filing for unemployment benefits for the first time declined in the latest week, as Initial Jobless Claims decreased by 13,000 to 553,000. However, the previous week's total was revised higher, which in essence negated the improvement. California (+75K), Virginia (+43K) and New York (+40K) reported the largest number of claims.

The number of people continuing to receive regular benefits, as measured by Continuing Claims, remained around 3.7 million.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extends benefits after regular benefits expire) decreased by a combined 750,000.

All in all, 16.5 million people are still receiving benefits throughout all programs. While this is down 850,000 from the previous week, these levels still remain extremely elevated.

Also of Note

However, there are signs that our economy is improving, as the first reading for first quarter Gross Domestic Product came in at 6.4%, which was in line with estimates and a strong number. The $900 billion stimulus plan that passed in December certainly contributed to the strong reading. We should expect second quarter GDP to be even stronger after the $1.9 trillion stimulus plan that was passed at the end of March.

In addition, the Fed held its regularly scheduled Federal Open Market Committee meeting. They left the pace of their purchases of Mortgage-Backed Securities and Treasuries unchanged each month. They also left the Fed Funds Rate (the benchmark rate at which banks lend money to each other overnight) unchanged. The Fed also reiterated that they believe any increase in inflation this spring will be transitory.

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