Remember those scary stories of sky-high inflation and mortgage rates from the 1970s and early '80s? Our central bank, the Federal Reserve, does. They're so worried about a sequel, they're trying to slow down our economy—even if it means causing a recession and job losses.
But here's the twist: recent reports say the fear of a '70s-like horror is way overblown. Today's scene is nothing like the '70s, when a scary trio—rent, salaries, and oil prices—caused inflation to rocket sky-high.
The Good News: Shelter Inflation
Here's the hero of our story: "shelter inflation," which is just a fancy way of talking about how much housing costs are going up. It makes up almost half of the overall inflation measure, the CPI. Experts predict it'll slow down over the next year, so we won't see that terrifying surge in overall inflation that happened in the '70s.
No Scare from Rent Inflation
Don't worry about a scary surge in rent costs either. The cost of housing is actually cooling off, and with nearly a million new apartment units about to open up, it'll put a stop to soaring rents. More supply equals less inflation—take that, 70s!
Mortgage Rates: The Silver Lining
Lower rent inflation is like the superhero for mortgage rates. If rents go down, mortgage rates might follow suit over the next year. So, despite major rate increases and a looming banking crisis, the nightmarish vision of '70s-style inflation is disappearing. In fact, it was never really there.
Predictions for the Future
The crystal ball shows the 10-year Treasury yield—a bellwether for mortgage rates—hovering around 3.37%-3.42%. Unless the economy revs up, this has likely peaked. If the job market holds up, and we don't see a surge in unemployment, we could be looking at mortgage rates around 5.25% for 2023.
The Fed and the Housing Reset
Imagine a housing market with 5.25% mortgage rates today! This would shock the Fed, which is hoping for a housing "reset." But such a reset would favor older Americans, leaving younger ones starting their life behind. That's why the Fed has been quiet on supporting the housing market.
The Job Market: Cooling but Stable
Yes, the job market has slowed a bit, but it hasn't fallen apart. The Fed is even predicting a recession with job losses for 2023. They're okay with job openings dropping down to around 7 million, where it was before COVID-19.
But if we were facing a '70s-style inflation, mortgage rates could actually go up during a recession, just like the plot twist in a horror movie. However, the bond market isn't buying the '70s inflation storyline.
The Takeaway
The Fed's plot for a recession continues, even as they see the inflation cooling down. What will they do when the job market finally breaks? With headline inflation cooling down, all eyes are on the housing market.
So, stay tuned! Keep a close eye on the weekly housing data. Despite all the drama in 2023, the rest of the year promises to be a thrilling ride!
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