June’s Inflation Slip Bodes Well For Homebuyers

Inflation cooled significantly in June, increasing by only 3% YOY, according to the Fed’s preferred inflation measure, the Consumer Price Index.

This is down from a 4% increase the month prior and fully a third less than its peak at nearly 9% last year.

June’s data suggests it’s possible for the U.S. to make a “soft landing” and reach its 2% inflation target without throwing the economy into recession. But it may yet be too early to celebrate.

“This is very promising news. The pieces of the puzzle are starting to come together,” Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives, told the New York Times. “But it’s just one report, and the Fed has been burned by inflation before.”

Plus, though the overall index saw improvement, the shelter component rose 0.4% last month and was up 7.8% YOY.

Shelter accounts for about a third of the CPI.

This puts mortgage rates and housing affordability at odds with each other. Lower inflation typically leads to lower rates. With the 30-year fixed-rate once again surpassing the 7% mark, any decline is a welcome relief for buyers, who have lost $30,000 in purchasing power since February due to rising rates.

But if shelter costs remain elevated, a decline in rates won’t translate to greater affordability. Home prices climbed 1.4% from May to June as demand outstrips inventory.

A serious rate slip could lead to lower home prices. Many potential sellers are locked into their current homes by sub-4% interest rates. Homeowners who want to move may jump ship when rates retreat, leading to more inventory and less competition. But rates would have to fall pretty drastically to seriously increase inventory.

Whether the Fed will raise rates in July is still up for debate. Some analysts point to the CPI as evidence that the Fed should hold off again and see what happens. Others say another hike is necessary to get ahead of inflation while it’s moving the right direction.

“If you back off too soon, inflation comes back strong, which then requires the Fed to do even more,” Thomas Barkin, Federal Reserve Bank of Richmond president, said in a speech.

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