Mind the flip: Denton’s housing market not immune to the fight against inflation

The recent price cuts on homes, which juiced activity, took the median Denton home price down to $349,999 in January. Median Denton home prices have fallen $60,000 (14.6%) from their bubble peak last summer. Home prices in Denton County have fallen 15% from the blow-off top last spring.

Area home inventory dipped with the recent surge in contracts. Denton was sitting on just 1.9 months of supply with the January figures.

Average percent of list price for Denton homes stood at 95.4%, up slightly from December. Average days on market for a Denton home rose to 50 days in January. Fear of missing out hysteria is long gone, with rates still at 6% and poised to rise higher in the months ahead.

Area rental prices continued to defy the deflationary narrative. Single-family rents in the city of Denton posted a year-over-year gain of 5% in January. Closed-lease prices were 6% higher in Denton County. For all of the talk about deflation or disinflation you may have seen in the media, it certainly hasn’t materialized for local renters. Inflated rents and a lack of affordable housing are still huge headwinds for the local market.

This brings us to the problem at hand. The boost in demand and overall sales activity to start the year is certainly welcome news for agents and home sellers. Unfortunately, the reacceleration of inflation just makes the Fed’s task of curbing inflation all the more difficult.

By all appearances, the local housing market is going to see a brief bounce in prices and activity before the next phase of the inflationary fight comes back for another bite at the apple.

After flirting with a 5 handle a few weeks ago, mortgage interest rates spiked by 50 basis points. The rate on a 30-year fixed-rate mortgage stood at 6.5% as of Feb. 10, according to Mortgage News Daily. Rates hit 7.37% in October. It will be interesting to see how the local housing market responds if rates take out that previous top.

The Powell Fed made an egregious error to start the year by taking their foot off the brakes too soon, and there will be consequences to pay for that. The bond markets are beginning to sniff this out. Area home sellers and property owners are going to have to get accustomed to the “higher for longer” theme because the inflation fight is far from over.

Headline CPI inflation for January posted at 6.4%. That was slightly higher than experts were forecasting. The progress from December’s inflation report was quietly revised away. The January CPI report showed that underlying inflation is well above 3% and may not be coming down. And that is before we throw in the upward pressure that could be exerted from a tight labor market.

The Fed is back to where it started

The first Federal Open Market Committee meeting of 2023 revealed a huge blunder by the Powell Fed. As the markets ramped up the entire month, asset owners cheered that inflation had been conquered. Housing market participants reveled in the headlines of a coming soft landing. Reality is a bit more sobering. Reality suggests Fed Chair Jerome Powell made a huge error by not squashing those animal spirits looking to cash in on years of unearned gains.

The Bloomberg Financial Conditions Index shows that Powell is right back where he started. In fact, financial conditions are currently looser then when the Fed first started hiking rates last year. If your stated goal is to curb rampant inflation in the economy and bring it down toward a 2% target, that’s a huge problem.

John Authers writes: “According to Bloomberg’s broad US model, financial conditions are now looser than they were on the eve of the Ukraine invasion. Remarkably, they are even more relaxed than when the Fed funds rate was still effectively zero last March, and easier than the average for the last decade.”

This has some serious implications for the real estate market. It also helps explain the boost in activity we saw during December and January as many of the supposed experts in the real estate sector proclaimed the housing market had likely bottomed. Anything is possible. Most of the asset owners holding onto inflated real estate are undoubtedly hoping the rate hikes are done so they can hold on to the bulk of the unearned asset inflation since January 2020.

The data says soft landing island is looking really crowded and terminal rates are not here yet. This column isn’t long enough for the nuances of how the fiscal and monetary plumbing work. What’s important for the purposes of the Denton-area real estate market is that higher rates aren’t going anywhere anytime soon, not with financial conditions so loose.

The Powell Fed could be forced to keep hiking well into 2023 with a higher terminal rate than was originally anticipated. All of the real estate pundits champing at the bit for lower rates could be waiting awhile as the Fed is forced to continue chopping away at the inflationary monster they created.

U.S. house prices decelerated rapidly in the second half of 2022. The problem for the Fed is those prices are still 37% above the level where they ended 2019 before the pandemic started. We’re still dealing with grossly inflated home prices and car prices. U.S. homeowners are still sitting on close to 10 years of normal price appreciation crammed into a two-year period. That’s serious inflation that has embedded itself into the U.S. economy.

There are a number of indicators suggesting inflation is far from vanquished. Hot labor market conditions, resilient consumer and household spending, and positive GDP growth certainly don’t indicate a recession. Then there’s a stronger U.S. dollar, loose financial conditions and a potential reopening of China. Put it all together and what do you get … more inflation!

When mortgage rates are back above 7% and inflation is still roaring, remember that Powell was busy spiking the football on the 50-yard line, having some good laughs with his friends at the Economic Club of Washington in February. If 2023’s first FOMC meeting was the worst policy error of the last 50 years, Powell’s glib attitude toward the task at hand was the icing on the cake.

Fasten your seat belts. 2023 could be another bumpy ride.