Housing inflation complicates June Fed meeting

Housing prices are on the rise again. Housing is a key part of inflation data, something the Fed is keeping a close eye on. So what sort of implications could this have for the June Fed meeting? Lindsey Piegza, Stifel Chief Economist, joins Yahoo Finance Live to break it down.

Video Transcript

BRAD SMITH: Investors are pulling back from the US housing market, making 49% fewer home purchases in the first quarter of than last year, according to new data from Redfin. And after seven months of declines, housing prices are ticking higher again. So what does this mean for the Fed decision in June? Let's bring back in Lindsey Piegza, Stifel chief economist here. So to what extent is the Fed going to read through some of the housing data and make their policy decision off of where that is slowing?

LINDSEY PIEGZA: Well, I don't think they're going to make their policy decisions specifically on home prices or shelter costs. But when we look at inflation in totality, we have to recognize that shelter is a substantial component, when we look at the CPI.

So from the Fed's perspective, this will be a driving force to whether or not they feel comfortable. Prices are on a clear downward trend, back to that 2% target. And in fact, as we heard from Fed official Bowman earlier this week, the lack of improvement in shelter costs will make it more difficult for the Fed to justify a change in policy as we don't expect that headline number to continue to retreat to 2% in a more discernible way. So from a housing perspective, I do think that this is going to be one of the sticking points for inflation.

Now, we have seen housing market activity slow precipitously, as you mentioned. Home sales are down, albeit that second derivative decline. Meaning still positive transactions, but significantly of reduced number of transactions.

But even with demand off of peak levels and supply arguably off of the low, there still is a sizable gap in terms of the housing supply relative to that demand in the marketplace, suggesting that we will see somewhat of a floor provided to home prices. That's not to say we could reverse course here and continue to see downward momentum, but an '07-'08 housing market, this certainly is not.

So from the Fed's perspective, when we talk about over 8% growth in terms of the shelter component in CPI, this is going to complicate the picture for June, particularly as that conversation among those supporting a pause comes into play against those that point to the shelter costs and say, we simply can't risk taking to the sidelines quite yet.

- But to your point, it's so funny that you talk about, this is not in '07-'08 because I've wondered that. And there's been sometimes conversation around that, particularly where we see the strong pricing power in parts of the country, particularly like you think of the Northeast. When you look at data coming out of the Northeast. Do prices need to come down more or will they-- do they even have that potential to come down more within the housing market in certain regions, especially again in the Northeast?

LINDSEY PIEGZA: Well, I think it's a national issue when we talk about the supply issues. Going into this cycle, we were at a multi-year deficit in terms of supply. And so even with natural population growth, immigration, natural household formation, even at these low levels, given that multi-year deficit of supply, that's going to continue to produce a gap between that clearing mechanism where prices would fall, allowing that equilibrium.

So I do think that from an affordability standpoint, absolutely. Potential homebuyers would like to see prices come back down more in line with the historical ability to make that home purchase. But when we look at market metrics, unless we see a significant run-up in supply, it's unlikely that we see any type of price decline as we saw in the '07-'08 housing market.

BRAD SMITH: Lindsey, you mentioned something earlier that was really interesting. And I'm trying to admittedly wrap my own head around it a little bit more. And as you were mentioning that we're going to see a bottoming setting in as more capacity comes online, I guess I naturally wonder why wouldn't that be or create some type of resistance to the upside for pricing?

LINDSEY PIEGZA: Well, I do think that it could, but you have to look at it from the demand side. And we don't expect a steady level of demand. We expect demand to continue to increase. As I mentioned, just with natural population growth, immigration, household formation, this is going to affect the other side of the equation.

So we can't just look at it as a vacuum and say, this is a steady of level of demand. If we increase supply, we can find a clearing level. We have to look at this as a constant moving target point. And demand is one of those key components that's going to continue to influence the level of prices in the marketplace.

BRAD SMITH: Well, I can't wait to get into the demand equation here, Lindsey, because New York is taking all my money right now. Lindsey Piegza, Stifel chief economist. Thanks so much for joining us here this morning.

LINDSEY PIEGZA: Thank you for having me.