Rental inflation is dropping … home sales spiked in February … another troubled bank … stretched budgets whether you’re a retiree or Gen Z

There’s good news on the inflation front, though when we contextualize it, it loses a little luster.

Shelter costs make up the single largest component of the Consumer Price Index (CPI) – about 33%. So, its movement has an exaggerated effect on CPI.

On Tuesday, we learned that rent increases for single-family homes just came in at their lowest annual rate since spring 2021.

Here’s Bloomberg with more:

Nationwide, the typical rent for a single-family home rose 5.7% from a year earlier, data from the real estate analytics provider show.

All 20 major metro areas tracked by CoreLogic posted single-digit annual rent increases, for the first time since late 2020. 

Keep in mind, this cooling has yet to show up in the CPI numbers due to lags in the way the numbers are calculated. So, as we move into spring, we should see the effect show up in the official CPI data.

Clearly, this is good news. What’s the “less good” part?

Remember the difference between rent inflation and absolute rent prices. Inflation – which measures changes in prices – can be very low while the price itself remains high (as it doesn’t change much).

So, when we analyze inflation, we have to translate it into its practical impact on the U.S. consumer, since consumer spending massively influences the health of our economy.

On that note, here’s MarketWatch:

Rental price growth may be slowing — but housing was actually less affordable for tenants in February compared to the previous year, according to a new report from Realtor.com.

February marked the seventh consecutive month of single-digit rent growth, and the median rent across the country’s 50 largest metropolitan areas was up a modest 3.1% from the same period in 2022.

However, rental prices were almost 21% higher than 2020’s levels, according to Realtor.com. 

February’s median rental price of $1,716 fell $1 from January — and that is likely of little comfort to tenants facing extra monthly costs of $296 than before the pandemic. 

Now, over the last two years, the rental market has seen higher rates partially due to would-be homebuyers who have been priced out of the home-buying market.

So, what’s the latest in housing affordability? And by extension, what does that mean for rental rates?

On Tuesday, we learned that home sales spiked in February

Sales exploded 14.5% from January to February. This was the first monthly gain in 12 months, and the largest increase since July of 2020.

For a bit more context, sales were still down 22.6% compared to this time last year. Despite this, the sharp monthly uptick catches the eye.

What’s behind it? And what does it signify?

Here’s CNBC:

These sales counts are based on closings, so the contracts were likely signed at the end of December and throughout January, when mortgage rates had fallen sharply.

The average rate on the popular 30-year fixed loan hovered in the low 6% range throughout January after reaching a high of 7% last fall.

The relative drop caused a jump in sales of newly built homes, before rates jumped back toward 7% in February.

As I write on Thursday, Bankrate reports that the current average interest rate for the benchmark 30-year fixed mortgage is 6.85%, so we’re higher than we were in January.

But the surge in buying isn’t solely based on lower financing costs. In February, year-over-year home prices actually fell for the first time in more than a decade.

Here’s The Wall Street Journal:

The national median existing-home sale price fell 0.2% in February from a year earlier to $363,000, the first year-over-year decline since February 2012.

Median prices, which aren’t seasonally adjusted, were down 12.3% from a record high in June.

This explosion of buying reveals how much housing demand remains today. And in a vacuum, it would suggest there’s a limit to how much home prices can fall since so many eager homebuyers are on the sidelines, waiting to swoop in.

By extension, that would suggest a limit to our gains on housing affordability… which would continue to price-out some would-be homebuyers… which would relegate them to the rental market… which would keep rents from dropping too much.

But, again, that’s “in a vacuum.” How this actually plays out could be far more complex.

Back to the WSJ to explain:

In the short term, any decline in mortgage rates is likely to spur more home-buying activity, said Orphe Divounguy, a senior economist at digital real-estate company Zillow Group Inc.

But if unrest in the banking sector makes consumers more anxious about the economy entering a recession, that could weigh on demand, he said.

Banks could also tighten lending standards, making it harder for home buyers to obtain mortgages, said Capital Economics in a note to clients.

Speaking of “unrest in the banking sector,” yesterday brought details of a new troubled bank

Let’s go to Bloomberg:

PacWest Bancorp is moving to shore up liquidity to protect itself after customers pulled 20% of their deposits since the start of the year.

The regional bank, whose shares have tumbled 58% this month, secured $1.4 billion from a financing facility from Atlas SP Partners and abandoned a separate push to raise capital because of market volatility, it said in a statement Wednesday.

PacWest’s troubles mirror those we’ve seen recently in other regional banks.

Soaring interest rates have hobbled the value of PacWest’s bond portfolio. Meanwhile, liquidity needs due to customer withdrawals have forced the bank to sell some of its bonds, locking in big losses.

Here’s Bloomberg with the size of PacWest’s recent borrowing to keep its doors open:

PacWest has already borrowed $3.7 billion from the Federal Home Loan Bank System, $10.5 billion from the Federal Reserve’s discount window and $2.1 billion from the bank term funding program as of March 20. 

While it appears PacWest has stabilized, Moody’s Analytics Chief Economist Mark Zandi believes more pain is coming for the broader banking sector.

Here he is from his interview with CBS News on Tuesday:

When you raise interest rates and you raise them as fast as the Fed has and as high as they have over the past year, things are going to start to wobble and break and it’s going to feel uncomfortable…

It’s going to get bumpy. And I don’t think it’s over.

Inflation is still high. The Fed’s still got to get inflation back in.

And so, the next 12-18 months are going to be uncomfortable.

A new report from Fidelity reveals “uncomfortable” conditions for the average retiree today

On Tuesday, investment giant Fidelity released its 2023 Retirement Savings Assessment report.

Here are some takeaways from Fox Business News:

[The report] shows the retirement score for the average American household has dropped into the “fair” range, with more than half of those surveyed, 52%, falling short of having enough savings to cover everyday essentials when they leave the workforce.

Fidelity found that more than a third of Americans, or 34%, will need to make “significant adjustments” in order to afford retirement, while 18% presently require moderate changes to save enough for the basics. 

Another 16% are projected to be able to cover essential expenses, but not discretionary spending on items such as travel or entertainment.

It’s not just older Americans that are struggling. According to a new report from Credit Karma, Gen Z just notched the largest increase in average debt level of any generation.

Here’s Bloomberg with more:

With decades-high inflation outpacing wage growth in most parts of the US, consumers are increasingly leaning on credit cards to make up the difference.

But Gen Z workers on entry-level salaries are having more trouble than their older counterparts keeping up with the soaring cost of living.

While the average credit card debt was the lowest for younger borrowers at $2,781, the growth outpaced all other generations at 5.9%. 

Gen Z drivers also saw the largest increase in auto loan debts at 2.3%.

Let’s refocus on the Fidelity report and retirees while ending on a more optimistic note

If you’re in or nearing retirement with a respectable nest egg but you need cash flow, you have some great options for high-yield savings accounts that keep your money liquid.

One example is UFB Direct (we have no affiliation with them). They offer an FDIC-insured savings account that pays an annual percentage yield of 5.02%. To be clear, this isn’t a CD or any sort of an instrument with a lock-up. You have complete liquidity.

If your challenge is not as much “cash flow,” but the size of your nest egg itself, that’s where our InvestorPlace experts can help.

On that note, a quick congrats to Louis Navellier’s Accelerated Profits subscribers. On Tuesday, they locked in partial gains on three positions, each returning more than 40%.

It’s just a reminder that while we’re not in a “rising tide lifts all ships” market, there are still good returns out there if you know where to look.

Have a good evening,

Jeff Remsburg