Portland Mortgage Market Update — May 17, 2024

It was CPI week this week, and rates enjoyed a cooler than expected report. The March CPI report showed that inflation rose only .3% for the month vs the .4% estimated increase. Year over year inflation decreased from 3.5% to 3.4%, which was more or less expected. Of note, however, was the main culprits that are bolstering inflation were shelter costs and motor vehicle insurance (again!). If we strip those two line items out, inflation is only up .27%- well under the Fed's 2% benchmark! We know the Fed can't do anything about the motor insurance component, but this is frustrating given that shelter is still causing problems despite being a lagging indicator.

How is Shelter a lagging indicator? What does that mean? Approximately 1/3 of the CPI is based on the Shelter component. Shelter is calculated basically by taking a moving average of market rental rates, as the Bureau of Labor and Statistics periodically samples tenants and updates their shelter figure when the tenant's rent changes. Since rents generally only change when a lease expires (usually once per year) the index for the shelter component will only gradually adjust with these lease expirations. So 1/3 of the CPI report (which is meant to deliver inflation data on a month-to-month basis) is based on rental figures that include a large chunk of data that is up to 12 months old. This why it is a lagging indicator- it doesn't represent real-time data and we are getting hit for inflation that has already happened. This is particularly troubling when Zillow provides real-time data that shows a softening rental market.

Speaking of shelter- we also got Housing Starts and Permits data this week. Those of us that have been telling our clients that now is the time to buy despite higher rates should take heed, because Building Permits are down 2% year over year. Completions are up 9% so builders are finishing the jobs they started back when rates were a little more favorable, they are scaling back their production in the current, higher rate climate. That means that once this inventory dries up, there will likely be a slowdown in new construction in the future which bodes well for appreciation. In short- home prices are not falling anytime soon