The painful sting of inflation sticker shock hit especially hard in May with consumer prices rising by 8.6%—the highest year-over-year increase since December 1981. The consumer price index (CPI) data from the Bureau of Labor Statistics (BLS) was digested quickly by Wall Street with the Dow dropping 250 points directly after the report was released. 

The BLS report shows energy prices rose by nearly 4% from April to May, putting the annual gain at more than 34%. Fuel oil on its own has gone up by 106% over the last 12-month period. Shelter costs are up 5.5% year-over-year. Perhaps the most frustrating data point for Americans is the current rate of inflation negates a lot of payroll raises they may have received. The BLS data shows real wages declined by 0.6% month-to-month with a 3% decline over the last year.

The BLS report will more than likely further cement the Federal Reserve's quantitative tightening (QT) agenda consisting of raising the federal funds rate and selling off its balance sheet. At the start of the pandemic, the Fed began buying mortgage-backed securities (MBS) and Treasury notes in an effort to keep the housing market afloat. That guaranteed buyer, along with a federal funds rate at 0%, helped push rates down as the economy became awash with capital. Now that the Fed has pulled back the reins, stopped buying MBS and started selling off Treasury notes, the private sector is shouldering more of the burden of providing the capital and becoming the buyer. When there are fewer buyers available, the price of the goods, in this case interest rates, goes up.

RATE-SENSITIVE HOUSING FEELING THE BURN

The headline this month is that mortgage demand is at its lowest level in 22 years. It might be more accurate to say that demand isn't the issue, rather it's affordability. The latest Freddie Mac 30-year fixed-rate mortgage average showed rates climbed again, hitting 5.23%, keeping many would-be homebuyers on the sidelines.

Freddie Mac's economists echo the sentiment that many have been pushing, saying that rising rates will help to settle the market and bring some sort of stability to home prices. In their report they write, "After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data. The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back. The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home."

Inventory is the other part of the equation as the insatiable demand during the COVID-era crippled the available number of homes for sale. And as we mentioned before, refinance volume was incredibly high due to the low rates which also affected inventory. More homeowners tapped into their equity and stayed in their homes versus selling them. 

The Mortgage Bankers Association Chief Economist Joel Kan said in a report, "The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months. These worsening affordability challenges have been particularly hard on prospective first-time buyers."