Name: Inflation Slows to Lowest Level Since 2021 in Latest PCE Report Data
Uploaded: 2023-11-30T15:32:00Z
Duration: 15 min 20 s
Description: The Personal Consumption Expenditures Index is one of the Federal Reserve’s most closely watched gauges of inflation. Markets are betting the data makes rate cuts more likely in 2024. WSJ's Dion Rabouin unpacks the figures. Photo: John Rucosky/Associated Press

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The Personal Consumption Expenditures Index is one of the Federal Reserve’s most closely watched gauges of inflation. Markets are betting the data makes rate cuts more likely in 2024. WSJ's Dion Rabouin unpacks the figures. Photo: John Rucosky/Associated Press

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Inflation Slows to Lowest Level Since 2021 in Latest PCE Report Data

Welcome, welcome into another edition of "Market Takes" because I know you could have been anywhere in the world, but you're here with me and I appreciate that. I am Dion Rabouin, reporter at the Wall Street Journal and today on "Market Takes", we are getting into and breaking down the latest existing home sales report. This was a big one, a big decline in the number of homes sale, the number of homes sold, excuse me. And we are gonna get into all that, what it means for the housing market, the economy, the market, all that good stuff. So, we are gonna talk through first what existing home sales or what this existing home sales report showed, how that compared to expectations. We're gonna talk about the big picture, state of housing and the housing market. We're gonna talk about the relationship between housing, the housing market and inflation, because I think this report has a lot to say about what's going on and what could come next for inflation. We're gonna check in with the markets because of course we always wanna know what's going on in the markets here on "Market Takes", and then we're gonna talk about what comes next because we are always looking forward, even though it is backward looking data. So, let's get into it right now. So, let's talk about it. The existing home sales report showed 3.75 million units sold year over year based on the estimate. That is a decrease of 4.1% from the previous month. Let's throw a chart up here up on your screen so you can see what I'm talking about in terms of the trend. So this is a 10-year chart. This goes back to October 2013. And what you see consistently since the start of really 2022 and continuing through this year is just a clear decline. You see that line moving down and to the right, that means lower sales, fewer sales are happening in the existing home sales market. And keep in mind, existing homes are about 80% of the market. So this is the big picture of overall what's happening in the housing market. Fewer and fewer sales, again, 3.79 million units, that's the monthly annualized number. So, based on how many homes were sold in October, the National Association of Realtors averages out, okay, here's what that would've been over a year. And based on that, we are down at the lowest level that we have been since 2010. That is a huge decline, even lower than during Covid when home sales, home tours, all that stuff got shut down. Well, there were even fewer sales this last month in October than there were at the bottom of that Covid sales period. Like I said, going back a 13 year low is what we saw. And again, the previous months sales had declined 2%. So this 4.1% decline, that was way more than the 1.5% decline that economists had predicted. So we are seeing that decline in sales actually accelerating in terms of what's moving month to month. And, this has been a trend, but it looks like the trend is accelerating the fewest number of homes sold since 2010. That is a big time worrier. Big time change and a big time move in the trend. And really this chart just illustrates how we have seen that trend move lower and continue and it looks like that could be going forward for a while. We've seen sales decline really every month since February in terms of this trend. The other thing though is that prices on the other hand have gone up. Prices have continued to rise. The median existing home sales price rose 3.4% from a year ago up to $391,800, the fourth consecutive month of year over year price increases. So what are we seeing? Again, we're seeing the number of homes sold decline. We are seeing the price or the average price for the number for the home sold rise. Now really what that gets back to is it's all about inventory. The the amount of homes that are available on the market, we actually saw inventory rise, and that's been consistent over the last few months, but it's still historically low. We actually saw the inventory of unsold existing homes rise 1.8% from the previous month to 1.15 million. That's the equivalent of about 3.6 months of supply at the current pace. Big picture, usually in a healthy home market where, you know the traditional home market that we've seen over the past 20, 30, 40 years, you got about six to nine months of inventory in the market. Now we've got three and a half months, a little more than that. And again, that's been rising from three months, which was a record low, we saw that back in 2022. But as these mortgage rates have risen, we have seen fewer people listing their homes because people say, well, usually when you're gonna sell your house, you're gonna wanna buy another house. And if I've got locked in at 3% mortgage rate, either I bought in 2020, 2021, 2022, or I refinanced during that time before rates went up. Well, if I buy a new house or an existing house, a new house, to me, I'm gonna have to pay 7, 7.5, 8% rates. We're gonna talk about rates in just a minute. Also, remember that the price does not account for rates. This is just the price of the home. So when you're financing, as most Americans do when they buy a house, you are paying significantly more than you would've been two years ago. Not only because the rates are much higher, but because those prices have continued to rise higher. And again, over the past few months, we have seen that. And this suggests that the trend of rising prices that we had seen coming into this month is continuing. So the big picture, few homes are selling, fewer homes are selling, but the ones that are are selling for a lot of money, prices continue to rise. And that's kind of the worst of all possible worlds. If you are a buyer, you're seeing limited selection and what you're paying, even though it's probably not your first choice, your dream home is going to be that dream home price or probably even more than you wanted to pay for your dream home. For sellers, because buyers are limited, it means that your house is likely staying on the market a little longer. You may not be able to get that price that you wanted or as much money as you wanted because people are so limited. And again, this all comes back to rates. So, the other chart I wanna throw up here on your screen is a rates chart. So you can just see what we're talking about in terms of mortgage rates. Now, that big takeoff you see right there, that's what's happening to the 30-year fixed rate mortgage. That's what most Americans have when they buy, they get a 30-year, and this is the rate, you're seeing we accelerated up to nearly 8%. You saw that record high, that not a record high, excuse me, a 23 year high for the week of October 26, 2023. We have come down a little bit from that. So you see how the line is going down now, but compared to the just huge acceleration increase that we saw over the past year, that little decrease we've seen over the past three, four weeks is nothing. The latest average is 7.44%. And again, that's down from where it was back at the end of October. But still, historically, the highest prices or the highest rates that we have seen in a generation according to the National Association of Realtors. So that is a big deal. And again, this chart is illustrating the movement that we have seen in terms of mortgage rates, really moving in one direction that's higher, even though we've come down the last few weeks, still much higher than we have been in the past. I wanna read you a quick quote from National Association of Realtors Chief Economist, Lawrence Yun. He says, quote, "Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation. Multiple offers however, are still occurring, especially on starter and mid-priced homes, even as price concessions are happening in the upper end of the market." Like I said, if you've got a house you're trying to sell for 750,000, 900,000, over a million dollars, you're generally having to give price concessions rather than having people you know get into bidding wars and getting 3, 4, 5 offers. And again, there are a lot of offers going out to some of those lower priced homes, but that's because there are just fewer of them on the market. Also, you're having people sort of having to bail out or bow out after they've put in an offer because they can't get financing because the monthly price, which is what everything comes down to because of high mortgage rates, is pricing people out. So someone who thought they could afford a $500,000 home, well now they can't because the mortgage rate is up at 7.5% and that's gonna make their monthly payment a lot more than what they would've anticipated even just a few months ago when they probably started this home purchasing process. Because remember folks going out looking for a home, this can be months on end and you can keep looking, keep looking, keep looking. You finally settle on a house and oh no, well, mortgage rates have gone up by one percentage point, and now you can't afford that house that you thought you could just a few months ago. Wanna read you one last quote from Lawrence Yun. He says, quote, "A typical homeowner has accumulated more than $100,000 in housing wealth over the past three years." Now, that's important because as we've seen, these prices have gone up, but a lot of folks are locked into their house and they can't sell because again, not only is it gonna take longer than likely they thought, not only are they not getting those same kind of those bidding wars that they were getting previously, but you also have to then go out and buy another home. And if you aren't gonna buy one for less than your current home is selling for, you're gonna have to finance. That means you're gonna have to pay more. You're gonna get locked into a higher rate. That's big. That all makes a big difference. And that's what we're seeing in the housing market. So, big picture, what does this mean for inflation? Well, this report shows that US consumers are still paying high prices for housing. They are not deterred, but there are fewer buyers out there. In the big picture, let's talk about rent. Let's talk about, because housing prices aren't just about housing, this has a direct correlation, the price of rent. My colleague Will Parker had a story out this morning talking about how single family home rents are rising more than apartment rents this year. And that's thanks in part to tenants who are paying large increases because they wanna buy, but they can't because that existing, you know, whether it's the down payment or what the monthly payment is gonna be, well, you would pay $3,500 a month, let's say, to buy a house and get that mortgage. Well now you're gonna have to pay a lot more for whoever did buy that house and is putting it on the market. So that's raising up the prices of monthly rents in terms of single family homes. The average mortgage payment is 52% higher than the average monthly rent check. That's according to real estate brokerage firm CBRE. Affordability as measured by the ratio of income to home purchase cost is at the worst level ever. That's for buyers since 1985, since at least 1985, according to John Burns Research and Consulting. So what does that tell us? It's harder for people to buy houses, homes are costing more, mortgages are costing more, and people aren't buying. That's what we see when we look at that chart, which is just showing us existing home sales at the lowest level in more than, or at least 13 years. So listen, we've talked about this on "Market Takes", this relates to inflation because when people are paying more for rent, they're paying more to buy a home. Well, that pushes prices higher. And we have seen a moderation as in a slowing down of the increase in housing costs. Just a few months ago, housing costs were accounting for 90% of the increase in inflation in CPI. We've seen that come down in the last few months. But as we are seeing mortgage rates continue to rise, as we see housing prices continue to rise, we could expect to see that inflation component of shelter or housing rising and pushing inflation up higher. Remember, the market's got very excited about the decline in the latest CPI for inflation. Well, the market's gonna want to keep its eye, and if you're an investor, you're gonna wanna keep your eye on what's going on with housing, what's going on with existing home sales, because this relates directly to that. Speaking of, let's take a look at what's going on in the markets. Let's throw up here on your screen so you can see what we're looking at. Stocks right now are down for the day. We got the Dow, the S&P and the Nasdaq, all negative. The Nasdaq down by 0.75%. Wanna put your eyes on gold right here because we are seeing a big day for gold. Gold price is really just taking off and that's generally a sort of bearish indicator, but the movement we're seeing in gold prices is pretty significant. But what it's all about when it comes to housing, it's all about bonds as you know. The 10-year yield, which is most correlated with those mortgage rates, has declined. And I wanna throw up here, what you're seeing right now is the 3-month chart. So you've seen mortgage rates, or sorry, not mortgage rates, the 10-year treasury yield rise almost to 5% back in mid-October. And since then we've really seen a consistent decline in terms of 10-year treasury. So you can expect those mortgage rates to start to come down a little bit, but we're still going to be seeing, we're not seeing a decline that would in that would indicate a slowdown on our decrease in mortgage rates to levels that we had seen a couple years ago, right? And we're seeing across the board bond yields coming back down, but remaining high, especially here in the 2-year yield. We've seen that come down to the last three months, but not really significantly. And when you look at the shorter dated, all those related most to what the Federal Reserve is gonna do, or what investors think the Federal Reserve is gonna do, those have come down and we can expect to see mortgage rates come down, but nothing really consistently. I want to also show you the WSJ dollar index. Again, what we see here is just a consistent theme of yields coming down. Bond yields coming down, the dollar coming down. And when we check out commodities, let's throw this up here on your chart right here. You see the same thing when you look at crude oil prices. Those have been coming down so there is some momentum to push and bring inflation back down. But those housing costs, right? Those housing costs could be a force in the opposite direction, potentially pushing inflation back higher or keeping inflation from falling as much as otherwise would. And really the markets just kind of illustrating overall investors' sentiment, investors' belief about this inflation trend. But keep an eye on housing. Housing is huge. Housing makes up 40% of the CPI index. It makes up a big chunk of the PCE inflation index that the Fed watches. So housing is going to be a big piece of the overall inflation puzzle. Keep your eye on that. And again, we are seeing, like I said, lower sales, but higher prices. And when there's lower sales, well that's keeping inventory levels down and that means that prices continue to stay elevated even though you're not seeing as many sales. What to watch for next. The University of Michigan's Consumer Sentiment Index is out on Wednesday. Been talking a lot about consumer sentiment because it has been low and falling even as inflation really has been turning lower. So that's something that we'll definitely wanna watch out for. We've seen gas prices come down, oil prices come down. Maybe that could give consumer sentiment a pickup as we've seen also stock prices rising higher. Definitely wanna keep an eye out for that on Wednesday. The PMI Report Purchasing Managers Index, that's coming out on Friday. That's gonna be big for inflation expectations because it's gonna tell us what businesses are doing, what they're seeing, and what they expect. And of course, next week we've got the PCE Report, the Feds favorite gauge of inflation. That's coming out next Thursday, November 30th. We'll be right here for "Market Takes". We hope you'll join us for that. Last but not least, for more, check out my podcast, WSJ's "Take on the Week". We are cutting through the noise to explain the major business and financial news that moves markets. Also, you can make smarter investing decisions, subscribe wherever you get your podcasts. So listen, that's gonna do it for us here on "Market Takes". I'm Dion Rabouin, reporter at the Wall Street Journal. Thanks so much for joining us. We hope you'll come back and join us again next time.