Potential Inflation Largely To Blame For Market Correction


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On Monday, the Dow Jones Industrial Average had its single largest one-day point drop ever. As of writing this, it seems the selloff has leveled out, but the question remains, what happened? It’s hard to pinpoint the exact catalyst of the correction, but the most obvious culprit is inflation (algorithmic trading has also been blamed). Although the 2.9% increase in wages from January’s employment report is great for consumers, it fuels inflation fears and corresponding worries that the Fed will need to raise short-term rates quicker than anticipated. The new Fed Chair, Jerome Powell, is expected to push three rate hikes this year, but he may need to change policy if the economy shows signs of overheating.

Ali Wolf, Director of Economic Research

Low Housing Supply Continues To Drop

Resale inventory totaled 3.2 months of supply in December, which is far below the 6.0 equilibrium level.

  • Housing supply has dropped year-over-year for the past 25 months
  • There were a total of 1.48 million units available for sale at the end of December, down 10.3% from last year.
    The lack of inventory is pushing prices up and lowering affordability, especially in the face of the aforementioned healthy housing demandMonths of Existing Home Inventory Zonda
Low Supply + High Demand = Price Appreciation

The Case-Shiller 20-City Composite Index for November increased 6.4% YOY. The national index also rose by 6.2% over the same period.

  • This is the 67th month of continuous year-over-year growth. While this is positive for existing homeowners, home prices are rising three times faster than inflation and more than twice as fast as wages making it difficult (but not impossible) for entry-level buyers to enter the market.
  • Markets with the largest YOY gains include Seattle (+12.7%), Las Vegas (+10.6%), and San Francisco (+9.1%)
Millennials Drive Up Homeownership Rate

The homeownership rate rose from 63.9% to 64.2% in the fourth quarter. This is the third quarter of growth, but remains below the historical average of 65.4%.

  • Millennials had the largest year-over-year increase in homeownership among any age group
  • The ownership rate among those under 35 increased to 36.0% from 34.7% a year earlier. This is in-line with the data we collect about Millennials each year, which shows 35% of those 28 and older want to own a home in the next 1-3 years.

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