David Uberti and Nick Timiraos of the Wall Street Journal report on last week’s CPI data showing that U.S. inflation eased slightly in April, with the consumer-price index rising 3.4% from a year ago. This inflation data should allow Fed officials to breathe more easily as it suggests prices and economic activity aren’t reaccelerating. Uberti and Timiraos note that this reading alone won’t change Fed officials’ calculations about whether and when to begin cutting rates.

Source: WSJ (May 2024)

Alicia Wallace of CNN comments on inflation, highlighting that the stock market rejoiced on the data, which shows an easing in inflationary pressures. Specifically, investors think that lower inflation and weak retail sales may lead to a Federal Reserve interest rate cut this year.

Fannie Mae also comments on the CPI data, noting that: 

“The April CPI report was in line with our expectations and is encouraging compared to the data received in the first quarter, though it’s clear that some underlying inflation remains sticky. Core services, for example, remained at a pace that is faster than what would be consistent with the Fed’s 2 percent inflation target but did slow to a 0.4 percent month-over-month gain from 0.5 percent in February and March and 0.7 percent in January…We continue to expect inflation will drift downward as the year progresses but will remain sticky enough to prevent rate cuts before September.”

As a result of the soft inflation data, mortgage rates dropped, according to Matt Carter of Inman. Mortgage rates retreated from 2024 highs for the third week and were below 7% after last week’s inflation release. This data will potentially incentivize Federal Reserve policymakers to cut rates sooner rather than later, as it was the first downward move in annual price growth since January. 

Finally, J.P. Morgan Wealth Management comments on the inflation data, highlighting that the Fed focuses on core inflation, of which shelter costs remain sticky. In April, the primary driver of core services inflation was the shelter component, with the shelter index, owner’s equivalent rent (OER), and rent of primary residence all increasing by 0.4% month over month. That said, J.P. Morgan strategists still anticipate that the shelter component will decrease later this year, as it takes longer for newly signed leases to affect the shelter index.

Source: J.P. Morgan (May 2024)

China’s housing rescue

Evelyn Cheng of CNBC reports on the Chinese government’s bailout plan for the country’s troubled property sector. Chinese authorities reportedly promised to provide additional support to state-owned enterprises, allowing them to purchase unsold apartments. This move aims to assist developers in securing more funding to complete construction on properties that have already been sold. These measures represent Beijing’s most recent attempts to tackle challenges within the extensive real estate sector.

Clare Jim of Reuters reports that local state-owned enterprises will purchase unsold homes from distressed developers at steep discounts, using loans provided by state banks. Many of these homes would be converted into affordable housing. China’s property sector accounts for a fifth of the economy and has been in a debt crisis since mid-2021 despite multiple policy measures.

Laura He of CNN comments on the new measures, noting that this initiative includes a 300 billion yuan ($41.5 billion) loan program by the People’s Bank of China to support these purchases, potentially leading to 500 billion yuan ($69 billion) in credit. Despite past efforts to revive the real estate market, sales and investment have declined, prompting significant policy actions to stabilize the sector and mitigate its economic impact.

Bloomberg quotes Zhu Ning, a finance professor at the Shanghai Advanced Institute of Finance, as saying: “This is a little bit similar to the bailing out of financial institutions going through the Great Financial Crisis…But in the end unless the central government is stepping in and extends its own credit to the real estate market, it’s a little difficult or too premature for us to believe we’re out of the woods.”

Source: Bloomberg (May 2024)

“The moves are set to further squeeze the margins of Chinese state lenders. The protracted property downturn has already thinned net interest margins and pushed up bad loans. Chinese banks’ net interest margin dropped to a record low of 1.69% as of the end of last year, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability.”

New construction

Hannah Jones of Realtor.com comments on new construction data showing that starts rose 5.7% in April. Single-family starts decreased by 0.4% in April but were 17.7% higher than a year ago. Multifamily starts rose by 31.4% month over month but were 32.9% lower year over year. Housing starts increased in the Midwest and South but declined in the Northeast and West. Further, homebuilder sentiment fell in May due to concerns about higher mortgage rates and cooling economic indicators.

Source: Realtor.com (May 2024)

Sarah Marx of HousingWire reports on single-family starts, noting that overall housing starts climbed to a seasonally adjusted annual rate of 1.360 million units, up 5.7% month over month and down 0.6% year over year. The growth was driven by multifamily housing starts, which totaled 322,000 units. Single‐family housing starts in April fell to 1.031 million units, 0.4% below the revised March figure of 1.035 million. The rate at which building permits were issued in April also dropped, falling by 3% month over month to a seasonally adjusted annual rate of 1.440 million, down by 2% from last year. 

Orphe Divounguy of Zillow explains that the slowdown in single-family housing starts could reflect a cautious outlook from builders due to higher interest rates and steadier housing demand. Resale inventory is also increasing, with homes going pending in just 13 days, unchanged from a month ago. Total for-sale inventory is up 18% from last year.

Finally, Logan Mohtashami of HousingWire (subscription required) comments on the slowdown, highlighting that higher rates are the main drivers of the lack of housing production. “In today’s report, single-family permit data is slowly falling as well — this means for the first time since 2022, we have both single-family permits and 5-unit permits trending lower together.”