The median home sale price increased +3.6% in April, the largest jump in monthly Zillow data since 2012.

Housing Appreciation Fueling Inflation

Despite a slight increase in supply, seemingly insatiable housing demand is outstripping housing inventory.  The result?  The fast and furious pace of home price appreciation picked up pace by +3.6% from March to April, the largest jump in data from Zillow going back to 2012.

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This scenario could challenge the Federal Reserve to increase interest rates more aggressively since housing prices feed into the consumer price index and the personal consumption expenditure index, two indices the Fed relies upon to evaluate inflation.

Because housing prices flow into inflation via rents and a metric called owners’ equivalent rent (estimates of what people think their homes would rent for), these two indices affect inflation readings with substantial lag time, according to research from the International Monetary Fund’s Marijn Bolhuis, Harvard University’s Judd Cramer and former US Treasury secretary Larry Summers.  Cramer said, “Even if home price increases were to stop, because we have seen such a run-up in home prices and because of the lagged structure of CPI, there were already large inflation increases baked in going forward.  Not only have (accelerating home prices) not stalled, they haven’t really started to decelerate yet by some private measures.”

Renewed Popularity of ARMs

With buyers, particularly Millennials, chomping at the bit to become homeowners, the combination of accelerating home prices and surging mortgage rates is motivating buyers to ask their brokers to be creative.  That creativity has translated into a renewed popularity of adjustable-rate mortgages (ARMs).

During the week ending May 6, ARMS increased to 10.8% of all mortgage applications, the highest percentage of total mortgage volume since March 2008.

Increasing Supply Not an Easy Fix

Senior economist Jeff Tucker with Zillow wrote that it may take inventory until September 2024 to return to 2019 levels.

Existing homeowners are staying put; older homeowners are aging in place in homes they’ve owned for years primarily due to rising interest rates; and new home builders are rushing to bring their houses to market but are hampered by supply chain disruptions that make it harder to get home necessities such as windows and garage doors.

Though the Federal Reserve is looking for our inflated economy to return to a “soft landing” with a 2% inflation rate, policy makers may have to bring the Fed fund rate to 3-4%, not the 2% the Fed would prefer, to tame inflation.  No wonder the Fed has a headache.

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