Have you tried buying a used car lately? According to Manheim, wholesale used car prices jumped by 21% between August and November, and much of this gain has not yet filtered through to retail prices captured in the CPI. Or a restaurant meal? Or a hotel room? What about housing?

Inflation, which has not been a huge problem since the 1970s, has finally reared its ugly head. By severely limiting the Federal Open Market Committee’s ability to respond to downside risks posed by Omicron, inflation has boxed the Fed in. Inflation is now the dominant driver of not only rates, but all risk assets, and although housing is not classified as a “risk asset,” prices can be influenced by what is happening. And our brokers are seeing a pause among borrowers.

The outlook for inflation and interest rates has become complicated. Many economic analysts believe that inflation will remain well above 2% for the foreseeable future, but not as bad as it has been in recent months. Perhaps consumers will see some incremental easing of price pressures around spring 2022, shortly after the Fedwinds down asset purchases. This could allow the Fed to delay raising the interest rates it sets until the second half of the year, since the labor market is unlikely to reach the Fed's goal of "broad-based and inclusive employment" until the summer. Orion’s brokers know that this would be good for anyone buying a home or refinancing their existing mortgage.

Many expect, however, that inflation readings are likely to get worse before they get better. Housing costs, which represent the largest and one of the stickiest components of the Consumer Price Index (CPI), are likely to accelerate further from here. Market rents have risen by 15 percent over the past year and most of those gains have yet to flow through to the CPI. That's because government statisticians survey properties only twice a year, and because leases reset infrequently.

What does all of this mean for Orion’s brokers and your clients? At this point any talk of lower rates is nonexistent. Home prices, which were on fire for much of 2020 and all of 2021, are expected to continue to increase but not as fast. Orion has noted that bidding wars have diminished in many parts of the nation. And mortgage rates are expected to increase as inflation continues to be a factor, but not dramatically. Brokers tell us that clients still want to own homes, regardless of interest rates, and that is good news.

‍

‍

‍

‍