Weekly Wisdom – February 8, 2023

By Hightower Great Lakes on February 8, 2023

Shifting Interest Rates Impact Housing and Auto Markets More Rapidly

The APR on new financed vehicles rose to 6.5% in 4Q22, up from 4.1% a year prior.¹ Similarly, mortgage rates peaked in November, reaching the highest level since 2002. In addition to higher lending rates, price inflation has contributed to higher costs for potential buyers. But the winds of change might be blowing.

The CPI annual inflation measure for used vehicles peaked in 2021 at +42% y/y, while new vehicles inflation peaked more recently last April at +13.2% y/y. Similarly, the peak annual increase in home prices, according to the S&P/Case-Shiller Home Price Index, was last April at +19.7% y/y.

Amid recent and ongoing supply chain challenges, new vehicles were difficult to come by. This placed upward pressure on the price for used vehicles throughout 2021, and now that new vehicles have become more readily available, used car prices are -8.8% y/y (still +38% vs. pre-pandemic level).

Chart 1: Annual Inflation Retreating as Interest Rates Soar²

The disinflation across the goods economy since last summer, including both the auto and housing markets, is a direct, inverse relationship with the Fed’s restrictive policy actions.

But there’s much more to the story; while restrictive monetary policy has a visibly direct impact, a more complex supply/demand dynamic remains under the surface, which will ultimately impact (and help measure) how the U.S. economy moves forward.

Easing Cost Pressures Supporting Economic Activity

Higher interest rates have clearly done their part. In contrast to the Fed’s continued policy actions, which have made monetary access more restrictive, mortgage rates have actually fallen materially since November.

A 30-year fixed mortgage rate is now 6.47%, compared to its November peak 7.35%. Coupled with declining prices and healthy consumer balance sheets, housing has become more affordable in recent months. Mortgage rates remain much higher than a year ago, when they were just beginning to rise, and annual rates were priced around 4%. But, in tandem, unemployment rate has hovered around all-time lows and personal income is up +4.7% y/y.

Supporting elevated prices, consumer balance sheets are healthy and vacancy rates/inventory are very low due to supply deficits across both the housing and auto sectors. While annual inflation has retreated, prices for homes and new vehicles remain elevated (+6.8% y/y and +5.9% y/y, respectively).

Overall, the pace of inflation is certainly easing, and this supports the consumer, but resilient demand and persistent shortages are keeping prices stable. We’re focusing on these markets to provide insights into the broader economy and consumer health – where do things go from here?

Housing Market Has Considerable Multiplier Effects for the Broader Economy

Home prices fell for the fifth-straight month in November, according to the S&P/Case-Shiller index report. Despite this recent downtrend, which is helpful for the potential homebuyer and has led to increased activity, there remains a supply deficit.

The U.S. is short an estimated 5.4 million homes due to 13 years of underproduction. The home shortage is up from an estimated 4 million in 2019. As prices and mortgage rates retreat, housing activity has rebounded.

Chart 2: Leading Indicators Show Inventory Deficit Continuing and Increased Buying Activity³

Click here to read last week’s Weekly Wisdom (2/2).

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¹ Source: Edmunds. As of January 4, 2023.

² Source: FactSet (chart). As of February 7, 2023.

³ Source: FactSet (chart): As of February 7, 2023.