Mortgage applications fell precipitously recently in direct response to a rise in interest rates.
We have seen the opposite effect too over the last several months in response to falling rates.
All this is to say (or prove) that mortgage applications and purchase activity are extremely sensitive to interest rates – surprising many people, including me.
So – this is one of the reasons it matters so much that I was WRONG about my inflation and falling rates predictions.
The other reason it matters so much is that many current buyers expect to be able to refinance into a lower rate in the coming months (which is one of the reasons they are willing to buy now and accept today’s higher rates).
The “Inflation or Deflation” debate continues to rage across social media – and I list some of the reasons the proponents use below.
Reasons for Disinflation or Deflation
- Falling money supply – due to less banking, less QE, less Fed stimulus (Steve H. Hanke had a column in today’s WSJ making this case very strongly)
- COVID supply shocks are over
- Inventory has been building up
- Demand is crashing or will crash in response to the Fed’s higher rates or a recession
Reason for Inflation
- High energy costs – lack of investment and/or Russian supply restrictions
- Tight labor markets/rising wages
- Overheated economy
- “Greenflation” (shifting energy supplies to renewables)
- Food costs – Ukraine, Russia, and fertilizer
- Re-shoring from China
- Government spending/borrowing
Both of them firmly believe we are still on track for falling prices, disinflation, or even deflation – and lower rates.
The primary reason is that recent CPI (Consumer Price Index) reports that scared investors worldwide were unduly influenced by gasoline prices and shelter costs.
Both Snider and Habib point out that shelter costs will fall, as the current readings are influenced by last year’s higher housing prices and higher rents (as many renters are still subject to last year’s 12-month leases – while the declining rents we are seeing now are not yet reflected).
Long story short: when declining rents and flattening housing prices work their way into shelter costs, CPI will fall much faster.
Similarly, as demand continues to fall, oil and gasoline prices will fall too. Snider hit much of this in his podcast today.
Snider makes the case in no uncertain terms that outside of energy and shelter costs, we are in a deflationary environment now.
In any case, I still remain firmly entrenched in the disinflation or deflation camp, as Mr. Habib and Mr. Snider have not failed us yet.
If you don’t believe Mr. Snider and Mr. Habib though – Alex Gurevich made an even stronger case for deflation in a recent MacroVoices podcast: Jay Powell Says: “Effects of Tightening Not Yet Felt;” Alex Says: “No Shit, Jay”
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