Housing Market May Be Getting Good News

The housing market may be getting good news, experts told Newsweek, as inflation decelerated in October—even as the cost of housing came in hot.

It's a development that suggests some progress in the Federal Reserve's historic battle against soaring prices, a hopeful sign for mortgage costs as the central bank may hold back on hiking rates for the foreseeable future.

Overall inflation rose by 3.2 percent in October, data from the Bureau of Labor Statistics showed on Tuesday, lower than the previous month's of jump of 3.7 percent. Meanwhile, core inflation, a measurement that excludes the volatile energy and food costs, ticked down a little to 4 percent.

The Fed has been hiking rates since March 2022 to bring down inflation that at one point had skyrocketed to a four-decade high. This most aggressive increase in rates since the 1980s has pushed up borrowing costs for things like cars, business investments and houses.

So What's the Good News?

Mortgage rates have hovered near the 8 percent for weeks, a level not seen since the turn of the century. But there have been signs of a softening lately. For the week ending November 3, rates declined to 7.61 percent, the lowest it's been in 18 months, according to the Mortgage Bankers Association.

A rise in prices at a slower clip in October may suggest to policymakers that they are making progress on the path towards their inflation target of 2 percent, realtor.com chief economist Danielle Hale told Newsweek. This, in turn, could be good news for mortgage rates.

"Any progress is welcome and it's a good sign for mortgage rates in the long run," Hale said.

Shelter costs, which include the cost of rent and what homeowners would pay for housing, and which contribute to a significant chunk of the monthly inflation data, were high at 6.7 percent in October but were offset by a fall in gas prices, the Bureau of Labor Statistics (BLS) said.

"The shelter index was the largest factor in the monthly increase in the index for all items less food and energy," the BLS pointed out on Tuesday.

But this was still down from both August and September, Hale said.

"It is the smallest year-over-year gain in shelter costs since September of 2022, when it was 6.6 percent," she said.

While a near 7 percent rise in housing costs is not something to celebrate, it was nevertheless an improvement, Hale said.

"More is needed, but this is a step in the right direction," she said. "All indications are that they will continue to drop and so eventually that will stop being a major driver of inflation."

What it means for the Fed

Last week, Fed Chair Jerome Powell warned that the job of getting inflation down to the central bank's target was not yet won and he left the door open for a possible rate hike if needed.

"We know that ongoing progress toward our 2 percent goal is not assured," he said in a speech. "Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so."

Hale suggested that policymakers are still likely to be cautious, even with an encouraging October inflation reading.

"They're going to be the last group to declare victory against inflation," she said. "So, before their December meeting, they're going to have another inflation report. They'll have another set of readings to look at, so this isn't the final word, but I do think it raises the likelihood that they won't need to hike in December."

The October report was a "favorable print" as the data came in softer in both headline and core, said Mike Pugliese, an economist at Wells Fargo.

"It was an encouraging reading for the Federal Reserve and the kind of long, long road back to 2 percent here," he told Newsweek.

Ahead of the meeting in December, Pugliese did not anticipate another rate hike and the latest inflation reading adds another data point to that hold scenario.

"It's been our expectation for a while now that the Fed is done hiking rates and I think this just further reinforces that, barring a big surprise between now and their meeting in a month. I think they will stay on hold with the Fed funds rates in December," he said.

The market reading of the inflation data soon after its release—yields fell, while the stock market went up—suggested that there was more confidence that the Fed was unlikely to hike rates.

"The market is reacting to the idea that lower inflation [means] less tightening, cuts eventually, not imminently of course, but at some point in 2024 or 2025 and you've seen yields falling," Pugliese said.

If the drop in yields, which tends to track closer to the direction of mortgage rates, are sustained, could mean lower mortgage rates.

"We're talking 15 to 20 basis points, not whole percentage points, but a little bit on the margin which which makes some sense, right. A little bit of a move down makes some sense in the context of one encouraging [consumer price index] reading," Pugliese said.

Michael Pearce, lead U.S. economist at Oxford Economics, suggested that the October inflation number should give confidence to Fed policymakers that inflation is on a downward trajectory but that rate cuts are still a ways off.

"The disinflation process still has some way to go," he said in a note shared with Newsweek. "It will still be a long time before the Fed is able to think about lowering interest rates."

Policymakers want to see sustained movement towards the 2 percent target, Pugliese added.

"This isn't about getting inflation to 2 percent for a month or two months or six months, but getting it there on a sustained basis and I think, on balance, the last several readings have been good news," he said. "The Fed is looking for several more kind of trending in this direction."

He added: "The way to summarize it is a journey of a thousand miles and it starts with one step, and this certainly wasn't the first step. There have been several before and I think there's several more to go."