{"id":3730,"date":"2022-12-20T14:55:30","date_gmt":"2022-12-20T14:55:30","guid":{"rendered":"https:\/\/frankbuysphilly.com\/too-hot-too-cold-or-just-tight\/"},"modified":"2022-12-20T14:55:30","modified_gmt":"2022-12-20T14:55:30","slug":"too-hot-too-cold-or-just-tight","status":"publish","type":"post","link":"https:\/\/frankbuysphilly.com\/too-hot-too-cold-or-just-tight\/","title":{"rendered":"Too Hot, Too Cold or Just \u201cTight\u201d"},"content":{"rendered":"
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This article is part of our Housing 2022-23 forecast series. After the series wraps, join us on February 6 for the HW+ Virtual 2023 Forecast Event<\/a>. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members<\/a>, and you can go here to register<\/a>.<\/em><\/p>\n It is of little surprise to housing market prognosticators and participants alike that the biggest housing trend in 2022 was the market\u2019s response to the record-breaking increase in mortgage rates, as the Federal Reserve tightened monetary policy to tame inflation. It\u2019s also no surprise that the questions on everyone\u2019s mind as we enter 2023 are: what will happen to inflation and how that will influence monetary policy and mortgage rates over the course of the year.\u00a0\u00a0<\/p>\n It has become apparent in 2022, and was recently confirmed in remarks by Fed Chairman Powell<\/a>, that the Fed is focused on the dynamics of inflation in parts. The first part is core goods inflation<\/a>, which increased dramatically in 2021 due to COVID-related supply disruptions in combination with a COVID-related demand surge for goods by domestic consumers. As the figure shows, that inflation surge is fading fast. Apparently, the transitory inflation story that was prevalent a year ago does apply, but only to the core goods sector of the economy.<\/p>\n The other, and significantly larger, sector of the economy is core services<\/a>, which comprises over 130 million workers, 86 percent of total non-farm employment<\/a>. Core services is almost 60 percent<\/a> of the total Consumer Price Index and shelter makes up 57 percent of core services. <\/p>\n As the figure shows, service sector inflation is still rising, largely due to the shelter component. That may seem initially disheartening for the 2023 outlook. However, shelter inflation lags observed rental and house price increases by approximately one year by virtue of how it is measured. We already know that rents and prices are declining, so it\u2019s just a matter of time \u2014 likely in 2023 \u2014 until the shelter component of inflation will cool.\u00a0<\/p>\n If core goods inflation is already cooling and shelter inflation is expected to do the same, then what\u2019s left? Core services, excluding shelter. Here, the crystal ball gets cloudier. Services providers are still struggling to find labor, their primary input. As a result, service sector wages are still growing quickly \u2014 faster than the overall rate of wage growth<\/a>, which is pretty strong itself.\u00a0<\/p>\n Less consumption demand would help, and this is why the Fed wants to keep raising rates. But by how much? The currently forecasted \u201cterminal rate\u201d \u2013 the Fed\u2019s best guess at the level where they can stop raising the fed funds rate \u2013 is not too hot, not too cold, but just \u201ctight,\u201d which will likely be 5 to 5.25 percent<\/a> by mid-next year. <\/p>\nHeadline Inflation is Over-Served<\/strong><\/h4>\n