Main Takeaway: Interest rates will go down, or so the experts predict. With the economic headwinds brewing most experts believe the rapid rise in interest rates will decelerate and we’ve likely hit peak inflation and fed rates.
Story: New Consumer Price Index (CPI) data was released last week showing a deceleration of inflation. According to the Bureau of Labor Statistics (BLS) the December CPI dropped 0.1% month over month, and rose 6.5% year over year. This was a decrease from the November data which showed a 0.1% MoM increase and a YoY jump of 7.1%.
This was generally perceived as good news in the market as an indication that with inflation decelerating, the Federal Reserve may begin to take a more dovish approach to rising interest rates. At the moment, the average 30-year fixed rate sits at 6.33%, down from an October high of 7.08%, according to Freddie Mac.
The New York Times commented on the data, noting that:
“The takeaway is that inflation is moderating meaningfully…Several factors should help to slow price increases this year. A pullback in goods price inflation is expected to help cool overall inflation this year as supply chains heal. Climbing rental costs bolstered inflation in December and could continue to push inflation higher for a while, but that is expected to reverse by mid-2023. Rents for newly leased apartments have begun to climb much more slowly, private data suggests, which will feed into the government’s official inflation measure over time.”
Logan Mohtashami, lead analyst at HousingWire, boldly made the following statement about the inflation data:
“Today’s inflation data has shown that the peak growth rate of inflation is behind us. This should also mean mortgage rates have hit their highs. The key phrase I have stressed since I wrote about the case for mortgage rates to go lower on Oct. 27 is thinking 12 months out. The trend is your friend, and the month-to-month data has cooled off noticeably.”
The Mortgage Banks Association (MBA) also reported an increase in mortgage and refinance applications this week. Applications jumped almost 28% week over week according to MBA, with refinances jumping 34%.
So what will happen at the next Federal Reserve meeting on January 31st? The markets are betting on a quarter point increase despite the continued cooling of inflation. According to CNBC, markets are giving it a 94% likelihood that the Fed will raise by 25 bps, adding that “[e]conomic data Wednesday helped solidify the idea that after a succession of aggressive increases, the Fed is ready to take its foot off the brake a bit more.”
The drumbeat for higher rates isn’t quieting down at the Feb, with Reuters reporting this week that Cleveland Fed President Loretta Mester stated that increases need to continue toward the 5-5.25% benchmark policy rate (currently 4-4.25%).
This signals there is still an outside chance of a larger increase at the end of the month. The reality is that the Fed interest rate hikes are a lagging factor on the economy, how long it takes depends on the studies you read. Some say 2-3 years, while the Fed itself has found 2-4 months generally.
The reality for multifamily investors and owners is that we are still in a rising rate environment and we shouldn’t breathe a sigh of relief just yet. Keep stress testing higher rates, watch your expenses and LTVs, and seek out opportunities for tenant retention and NOI maximization.
Expert Take on Interest Rates in 2023
“Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.” — Mike Fratantoni, MBA’s SVP and Chief Economist
“CPI report makes it crystal clear that we don’t need mass joblessness to bring down inflation…Further interest rate hikes will only weaken our economy and the most vulnerable workers will pay the biggest price.” — Rakeen Mabud, chief economist at the progressive Groundwork Collaborative