All Things in Moderation

Vital Statistics:

Stocks are lower this morning after lead sled-dog Netflix stunk up the joint with earnings after the close yesterday. Bonds and MBS are finally having an up day.

Fannie Mae anticipates that 2022 will be establish a new “normal” for the housing market. The top-level view is that inflation will remain elevated for the year, and home price appreciation will slow to the high single digits. Economic growth will also return to longer term trends. GDP is expected to fall to 3.1%, home price appreciation will grow 7.6%, and inflation will start at 7% before slowing to 4%.

“We expect economic growth to continue slowing as the impacts of fiscal stimulus fade and the country’s attention increasingly turns to rising inflation,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The Fed has accelerated the pace at which it intends to reduce monetary accommodation, as inflation appears more resilient than initially expected. Currently, we expect inflation to run above the Fed’s two-percent target through 2023, and for the Fed to respond by tightening over that period. The resultant rise in interest rates will likely put additional stress on housing affordability measures vis-à-vis higher mortgage rates for consumers and the continued, though decelerating, rise in home prices. While consumers still have a significantly elevated level of savings, the rate of saving has fallen such that, over time, we believe ‘excess’ saving will likely be eroded and affordability increasingly constrained. We observe an early indication of this in recent increases in debt-to-income measures associated with incoming mortgage originations.”

One of the bigger inputs to the inflation indices is home prices, although it tends to impact the index with a 12-18 month lag. Rental prices, along with owner’s equivalent rent are the vehicle. Rents are increasing at a rapid clip, according to Redfin.

The Index of Leading Economic Indicators rose in December, according to the Conference Board. “The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first quarter, headwinds from the Omicron variant, labor shortages, and inflationary pressures—as well as the Federal Reserve’s expected interest rate hikes—may moderate economic growth. The Conference Board forecasts GDP growth for Q1 2022 to slow to a relatively healthy 2.2 percent (annualized). Still, for all of 2022, we forecast the US economy will expand by a robust 3.5 percent—well above the pre-pandemic trend growth.”

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