In the early weeks of 2022, the state of the economy is characterized by a surprisingly tight labor market, record levels of inflation, a significant jump in the 30-year fixed mortgage rate, volatile building material costs, and supply chain issues on top of uncertainty brought about by the omicron variant of COVID-19. Inflation, ranging between 5.5% and 7% depending on the source and factors considered, remains a major area of concern for not just the housing market but the economy overall, Zonda chief economist Ali Wolf said during the latest COVID-19 Update webinar.
“Inflation probably is the No. 1 risk to the market right now,” says Wolf. “Both the CPI [Consumer Price Index] and the PCE [Personal Consumption Expenditure] are pointing to very high levels of inflation. If you thank back to what is deemed to be the right level of inflation, it’s an average of 2%. So, clearly we are at a level that is not healthy and not at a level we would want to sustain.”
Wolf says that while leading economists are projecting inflation could range from 2.7% to 7.5% in 2022, Zonda is forecasting that the level of inflation will start to go down throughout the year.
“We forecast inflation will come down to 3.5% by the end of the year,” Wolf says. “[In this scenario], there is an aggressive Federal Reserve, raising rates four to five times, demand is strong, but we start to see a more even balance between goods and services, the supply chain gets better, and higher wages start to entice some of those people who left the labor force to get back in. To me, that seems like a more rational thought process of where we could wind up.”
How inflation develops will play a role in the Federal Reserve’s behavior with the Federal Funds Rate and the short-term interest rate and could factor into the movement of the 10-year treasury, which could factor into the movement of the 30-year fixed mortgage rate.
“Anyone forecasting interest rates needs to capture what is happening with the 10-year treasury, what is happening with the economy, what the Federal Reserve is anticipating doing, and how investors are taking this information,” Wolf says. “The forecasts of financial economists is that the 10-year is likely to go up from here, which tells us the 30-year is likely to go up as well. Our forecast was 3.5% at the end of 2022. I think what we all should be expecting is some volatility and sensitivity to what is happening with those interest rates.”
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