Top Line

  • Housing is the biggest obstacle

Housing is the biggest obstacle — Housing costs are the largest component of how inflation in the U.S. is measured. Housing, for example, makes up approximately 42% of the core Consumer Price Index (CPI) and 18% of the core Personal Consumption Expenditures (PCE) index (these core indices exclude volatile food and energy costs).

The housing components in each index have been increasing at an annualized rate of 5.5% to 5.9% in recent months, creating a large obstacle to achieving the Federal Reserve’s (Fed’s) 2% inflation goal. “Housing is the biggest stumbling block,” said Chicago Federal Reserve President Austan Goolsbee. “We thought we basically understood the mechanical, short-run model of how much housing inflation should be coming down. And it hasn’t come down as fast as we thought it was going to have come down at this point.”

Much of the pressure on housing costs is well documented—insufficient supply of new and renovated housing units, as well as rising population in certain areas due to work from home relocations and immigration. However, housing inflation is not impacting people evenly within regions or even within neighborhoods.

Homeowners that locked in 2% and 3% fixed-rate mortgages—and have not relocated over the past two years—are happily staying put with low mortgage payments. Meanwhile, recent home buyers (i.e., late 2022 and more recent) have been hit with significant price appreciation of homes: some 5.5% annual growth, after double-digit increases in 2020 and 2021 (Figure 1), plus mortgage rates with 6% and 7% handles.

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Source: Case Shiller, Bloomberg

As for rental costs, multifamily rents in most major metropolitan areas have risen about 1.5 times faster than wages over the last four years. Nationwide, rents climbed by about 30% from 2019 to 2023, according to an analysis by Zillow Group. At the same time, personal incomes grew by only about 20%, according to the U.S. Bureau of Labor Statistics. From 2020 to 2023, growth in rents outpaced growth in incomes at an even greater pace in the Southeast, Texas, Arizona, and Rocky Mountain states, as relocating retirees and work-from-homers fueled demand.

Yet the trend is now shifting. Increased multifamily construction over the past two years has helped to slow rent growth in previously hot markets (Figure 2). On the other hand, rent growth is heating up in the Northeast and Midwest, regions where rent growth has recently leaped above the national average.

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Source: CoStar Apartment Monthly Rent Report, March 2024

Similar trends hold when comparing the 50 largest metropolitan areas (Figure 3). Cities and neighboring suburbs that once had rent growth outpacing the national average (such as Nashville, Jacksonville, Salt Lake City, and Austin) are now underperforming, while the hot metropolises for rent growth are currently in places like Chicago, Columbus, Washington D.C., and Louisville.

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Inadequate supply of new housing over the past several years has clearly contributed to housing-cost inflation. “Housing is a real problem in the United States due to a huge shortage of affordable housing, and in part because of high interest rates,” Treasury Secretary Janet Yellen told Bloomberg News. “That said, I strongly believe—I think it is highly likely—that shelter costs, which have been pushing up inflation, will come down.” The good news is that the supply of multifamily units is increasing to meet demand. And the greatest supply is in areas with the highest population and rent growth.

In addition to being the biggest component of both CPI and PCE, housing also operates with the longest lag, in terms of supply affecting prices. New multifamily supply is, however, finally starting to slow the rate of rent growth. “I am confident that as long as market rents remain low, this is going to show up in measured inflation,” Fed Chair Jerome Powell told reporters last week. We hope such confidence is merited—and that interest-rate cuts by the Federal Reserve follow in 2024.

From the Desk

Agency CMBS — Our markets are mostly status quo week-over-week. GNMA spreads are marginally tighter, mostly due to low supply and lukewarm demand. FNMA spreads tightened one to two basis points in the five- to 10-year tenors, while remaining unchanged on the long end of the curve. Spreads continue to show strength, given the lack of supply and some renewed demand from end accounts.

Municipals — AAA tax-exempt yields were mixed across the yield curve, week-over-week. The front end of the curve was slightly higher and the long end was slightly lower. While the housing sector was fairly quiet last week, transactions that did come to market priced wider than the week before. Municipal bond funds reverted to outflows last week: $548 million left the market, after three straight weeks of inflows. Nevertheless, the high-yield fund subset had inflows of $125 million, the fourth straight week of inflows. Exchange-traded funds (ETFs) have also seen inflows over the last few weeks, totaling over $1.7 billion in May. (Note: when the market has bond-fund outflows, some of those dollars go right back into ETFs).

Economic Calendar for the Week Ahead

Existing Home Sales, MoM05/22/24Apr0.5%-4.3%
Initial Jobless Claims05/23/2418-May220k222k
Continuing Claims05/23/2411-May1,791k1,794k
S&P Global U.S. Manufacturing PMI05/23/24May P50.150.0
S&P Global U.S. Services PMI05/23/24May P51.551.3
New Home Sales05/23/24Apr675k693k
Durable Goods Orders05/24/24Apr P-0.6%2.6%
Source: Bloomberg. “YoY” = year-over-year; “MoM” = month-over-month

Summary of Global Fixed-Income Markets

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.