Rents Are Keeping Inflation and Rates Higher for Longer

The Weekly Recap

Good morning! Interest rates ticked up above 7% for the first time this year. Home sales fell nationwide in March except for in the Northeast region which saw an increase for the first time since November 2023. More Fed officials, including Jerome Powell, have said patience is needed before they cut rates but still believe they will happen this year. New York is the top destination for relocating tech workers. US retail sales beat estimates. Amid global inflation, the US Dollar is still on a tear and barreling through global currencies and Barbie mania still exists as Heinz is releasing a new hot pink colored sauce called “Barbiecue” Sauce, because why not?

Rents Are Keeping Inflation and Rates Higher for Longer

The last few months of CPI data have continued to not just come out hotter than expected but also to be trending in the wrong direction. It’s given the Federal Reserve pause in its strategy for lowering rates which looks like it will occur in the back half of the year now. Stripping down all the data, the two sectors of the economy that are the major factors in continuing to drive inflation up are energy and shelter costs.

When inflation was over 7% in 2022, it was relatively spread across goods and services. Now what’s left of the problem is mainly about housing.

Inflation has a disparate impact on renters rather than buyers. Where buyers can lock in rates that secure their monthly payment for 30 years, renters are consistently at the behest of market conditions year over year as rental pricing continually fluctuate. The argument can be made that interest rates being higher for longer has a direct adverse impact on rents.

High rates create an affordability problem for first time homebuyers. When first time homebuyers are forced to remain renters, it eats up available supply that should be taken over by folks that enter the workforce and look to find independence with renting. The increase in demand drives prices up, when people who want to purchase a home or those who have been trying to save to buy are forced to rent longer, it creates a longer timeline for which they need to save in order to purchase. Combined with housing shortages in major markets in the Northeast and Midwest, inflation for rents will continue to linger longer.

While the Fed continues to strive for the 2% target inflation number, they may be creating more issues than solving by maintaining a higher rate environment where lowering rates could move people into homeownership and alleviate pressures on the rental market place.

Energy as a commodity is hyper volatile. With wars escalating in the Middle East and the Ukraine/Russia war, drilling in those parts of the world has lessened. So much so, where the United States has become the #1 exporter of oil in the world. When supply dampens and demand remains constant, prices go up. Regardless of an individuals socio-economic standing, everyone consumes energy. Global war and conflict is not necessarily something anyone can control directly. Markets move with the ebbs and flows of the moment.

What drives markets to react negatively or bearish is when uncertainty hits and the confidence that was shared by most in the beginning of the year seems to have waned and patience has become the operative word.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past week as well as newly signed contracts in Manhattan.

Mortgage Rate Update

Mortgage rates ticked up above 7% for the first time this year. As rates trend higher, buyers continue to weigh the cost/benefit of when the correct time to buy mat be for them. Last week, purchase applications rose modestly in a welcome sign of positive activity.

News You Can Use

• Dollar Heads for Best Run in a Year Bloomberg

• New York Tops Destinations for Relocating Tech Workers Wall Street Journal

• US Retail Sales Top Forecasts as Consumers Keep Fueling Growth Bloomberg

• Home Sales Dropped in March Except for in the Northeast CNN

• Asset Managers Most Bullish in Over Two Years Reuters

• Fed Chair Powell Says There Has Been a ‘Lack of Further Progress’ This Year on Inflation CNBC

• Wall Street traders Keep Underestimating America’s Economic Strength Axios

• New York Fed Chief Still Expects Rate Cuts to Begin this Year Bloomberg

• Two Year Treasury Yield Briefly Tops 5% CNBC

• Mester Says Fed Can Hold Rates Steady, Not In a Hurry to Cut Bloomberg

• Retail Sales Jumped 0.7% in March, Much Higher than Expected CNBC

• Powell Signals Rate-Cut Delay After Run of Inflation Surprises Bloomberg

• Wall Street Pushes Out Rate-Cut Expectations CNBC

• Heinz Hot Pink ‘Barbiecue’ Sauce Is Coming to Grills this Month Bloomberg

The Deep Insight

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