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Producer Prices Downshift For First Time Since 2020 Recession. My Dad always says if you’re a real estate investor, focus on the Producer Price Index, not the Consumer Price Index. And, as you know, father know best. He says this because the PPI is a leading economic indicator of CPI in the months ahead. Sure enough, the Producer Price index fell 0.5% in July, according to the Labor Department. That’s down from a 1.0% jump in June and the first negative monthly percentage since April 2020. Meanwhile, the “core” Producer Price Index (which excludes volatile food and energy prices), rose 0.2% in July, down from a 0.3% gain in the prior month. In annualized terms, the headline PPI was up 9.8% in July, but down from 11.3% in the prior month. Core prices are up 5.8% from a year earlier, but down from 6.4% in June. The good news is also that the cost of goods fell 1.8 % in July, the largest decline since the 2020 pandemic recession. The cost of services inched up 0.1% last month, down slightly from 0.3% in June. Energy prices dropped 9% in July, down sharply from a 9.4% gain in the prior month. Wholesale food prices jumped 1% after a 0.2% drop in June. But there could be more relief in coming months as earlier stage processed foods (my favorite) fell 0.1% for second month in a row. Economists don’t expect too much more moderation in producer prices until later in the fall. Nevertheless, this potential peak in annual PPI inflation is a welcome sign for consumers, businesses, and especially our nervous FOMC. Remember, you heard it first.
Mortgage Rates Tick Back Up Above 5%. The 30-year fixed-rate mortgage averaged 5.22% as of August 11, according to Freddie Mac, up 23 basis points from the previous week. (One basis point is equal to one hundredth of a percentage point, or 1% of 1%.) Meanwhile, the average rate on the 15-year fixed-rate mortgage rose 33 basis points over the past week to 4.59%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.43%, up 18 basis points from the prior week. Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices will continue to rise, but likely at a much slower pace for the rest of the summer. Both rates and prices are challenging first-time buyers’ wallets. For example, the monthly mortgage payment on a typical existing single-family home (if a family pays with a 20% down payment) has jumped by $444 to $1,841, with rates rising from the first quarter to the second quarter of this year. For a buyer looking at a starter home, valued typically at $351,000, with a 10% down payment loan, their monthly mortgage is $1,810. That’s up 31% from the prior quarter, and up 49% from one year ago! Meanwhile, the yield on the 10-year Treasury note closed Friday at 2.76%.
Sun Belt Apartments Set Up For Significant Collapse Of Demand. Rent growth is slowing considerably around the country, especially in some of the Sun Belt markets that were once scorching-hot, a new report shows. For the first time since 2020, 12 markets experienced a drop in asking rents over the course of a month, according to a report released Wednesday by Co-Star-owned Apartments.com. The markets that experienced the most month-over-month rent declines in July included Miami with a 0.5% drop, Phoenix with a 0.4% drop and Dallas-Fort Worth with a 0.2% drop. Beyond these markets where rents are falling, other hot markets are also seeing a slowdown in their pace of rent growth. Though Sun Belt markets still occupy eight of the top 10 spots for growth, many have seen that growth percentage decline by double digits since last year, per the Apartments.com report. In Palm Beach, Florida, for instance, rent growth peaked at 30.6% in the fourth quarter of last year. By the end of July, growth was at 12.7%, per the report. "While multifamily yearly rents continued to perform well above historical averages, the deceleration of rent growth quickened at a time when markets typically post their best results,” Jay Lybik, national director of multifamily analytics at CoStar Group, said in a statement. "The deteriorating rent situation highlights a significant collapse of demand in the sector when new unit deliveries are projected to hit 230,000 in the second half of 2022." Though Florida is home to four of the five top markets for rent growth, it's not the only place seeing signs of a slowdown: Las Vegas rent growth also declined by double digits. There were some markets that performed better. In San Francisco, average rents rose 40 basis points over the past month, nearing the market's all-time peak. The East Bay in California also didn't see a decline in rent growth.
California Rents Skyrocket 10%. Blame inflation. Speaking of rents, some California landlords can now bump up rent demands by as much as 10%, the maximum annual increase under a law passed three years ago. The tenant protection and rent control law (enacted in 2019) allows landlords to raise rents by 5% annually, plus the rate of inflation in their metropolitan area, with a maximum of a 10% hike. In previous years, the total increase has hovered between 5.7% and 9%. But the 10% limit applies only to complexes built before 2007 and those not subjected to rent-control restrictions, meaning that landlords of buildings that fall outside those parameters can raise their rents even higher. And because inflation is so high across the board right now, every region in the state meets the requirement for the cap to be set at a 10% increase. In Los Angeles, units built before October 1978 are forbidden from increasing rents until a year after the COVID-19 emergency period is over. The city banned evictions for nonpayment of rent for tenants who have endured financial hardships because of the pandemic, including lost jobs and higher medical bills and child-care costs. But many parts of the rest of the state have no such protections. A 10% rent hike would make up for an increase in expenses in most cases, but not in Los Angeles. That’s because the city extended its eviction moratorium for qualifying tenants through the end of the year.
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