Inflation 2.0

November 2024

The macroeconomic stage has been buzzing lately, and financial markets are already shifting gears in anticipation of a Trump presidency. While the U.S. election results weren’t exactly a shocker—polling gave us a fair warning—the market’s reaction has been nothing short of dramatic. The swift moves suggest a far wider range of potential outcomes than initially imagined between the two candidates. 

At the heart of the current housing market story is the cost of borrowing. Mortgage rates, closely tied to 10-year Treasury yields and long-term inflation expectations, continue to climb. Meanwhile, equities are on a tear, gold is selling off, and whispers of inflation are turning into loud chatter. Is this the start of an inflation revival? In this market report, we’ll dive into the key economic themes expected to emerge under a Trump presidency. We’ll explore how these policies could stoke inflationary pressures and what it all means for the housing market. Spoiler: there are plenty of twists and turns ahead.

The Skim:

1. Inflation Hedge: Buy A Home

2. Demand: Surprisingly Resilient

3. Supply: A Little Pop

Inflation Hedge: Buy A Home

If you’ve been grocery shopping, paying rent, or booking a flight over the past few years, you’ve felt the pinch: the cost of living has risen much faster than wages. From where we stand, the recent surge in inflation comes down to three key factors: tax cuts during Trump’s first term, the unprecedented wave of liquidity injected during the COVID-19 pandemic, and an aging U.S. population shrinking the labor force. While the Federal Reserve has made solid progress in taming inflation without derailing the broader economy, we’re not out of the woods yet. The next wave of policy decisions could easily add fuel to the fire.

Based on his campaign’s stated priorities, a Trump administration's economic agenda would likely focus on three major areas: additional tax cuts, tariffs to promote domestic manufacturing, and stricter immigration policies—potentially involving large-scale deportations. Here’s how these policies might impact inflation:

1. Tax Cuts

Tax cuts, like those introduced in 2019, tend to boost inflation—especially when the economy is strong, and the labor market is tight. Why? Cutting taxes puts more money in people’s pockets, driving demand for goods and services. In a labor market already stretched thin, this demand forces businesses to raise wages to attract workers, pushing costs—and prices—even higher. Layer in the potential effects of deportation policies shrinking the workforce, and inflationary pressures could ramp up again.

2. Tariffs

Tariffs on imported goods are another potential inflation trigger. By making imports more expensive, buyers of goods are more incentivized to turn to domestic production. Domestic production is extremely expensive in the US, so tariffs are directly inflationary -- whether consumers pay the higher prices or find alternative supply chains. While tariffs might encourage companies to consider reshoring their supply chains, which is beneficial for our economy and national security in the long run, the process of building up domestic production capacity takes years, not months. In the meantime, the immediate effect of tariffs is higher prices for consumers.

3. A Stricter Immigration Stance

Looking purely at the economic implications, reducing the size of the U.S. labor pool through deportations would exacerbate inflationary pressures. Labor shortages already exist in industries like agriculture, construction, and hospitality, and reducing the workforce further would drive wages higher—leading to higher costs across the board. Implementing large-scale deportations would also come with significant expenses, which could strain public resources and reduce long-term growth potential.

What About Offsetting Policies?

Not all Trump policies are inflationary. Deregulation, for example, could lower costs in specific industries by fostering competition and reducing bureaucratic red tape. Rolling back parts of the Dodd-Frank Act might ease borrowing costs for consumers, while increasing domestic energy production could stabilize or even reduce gas prices. These measures could provide some relief, but they’re unlikely to outweigh the inflationary effects of tax cuts, tariffs, and stricter immigration policies.

Putting It Together: Why This Matters

In the short term, these policies could drive economic growth, boost incomes, and create jobs—but at a cost. Rising labor and material costs, coupled with higher interest rates, would push up home prices and make borrowing more expensive (as well as the rest of everyday life). If you’re thinking about buying, sooner might be better than later.

The bigger issue is the long-term impact on federal debt. With $36 trillion in debt, every 1% increase in long-term rates adds $360 billion in annual interest payments to our budget. That's 7.5% of total federal revenue and would be equivalent to a 2% drag on GDP growth if spending was cut to offset these additional expenses. While proposed spending cuts and efficiency measures might help, they’re unlikely to fully offset the costs of additional tax cuts. For now, though, long-term fiscal health isn’t exactly a top priority for either party.

Let’s shift gears back to the local housing market amid these long-term macroeconomic themes.

Demand: Surprisingly Resilient

Supply: A Little Pop

Let’s check in on our trusty table summarizing the Denver metro housing market within a 10-mile radius of downtown Denver:

All Data taken from REColorado on November 14, 2024.

October continued the late-season trend of increased activity in Denver’s housing market, likely fueled by buyers trying to secure homes before mortgage rates climb even higher. Even though the Federal Reserve announced two rate cuts recently, mortgage rates have steadily risen, adding urgency for some buyers to lock in their deals. Pending sales jumped by 16.6% compared to last October, signaling renewed buyer interest despite lingering affordability concerns. It’s clear that buyers are making moves, even in a challenging rate environment, as the market looks to reverse its softening trend.

One standout metric is the surge in new listings, with 20% more homes hitting the market compared to October 2023. What’s impressive is that this increased supply was largely absorbed, marking the second consecutive month of rising pending activity. However, it’s worth noting that inventory remains significantly elevated year-over-year, with 40% more homes available than this time last year. The fact that inventory didn’t swell further despite the influx of new listings is encouraging—it suggests demand is keeping pace, albeit cautiously.

That said, the pace of transactions continues to slow. October marked the slowest month this year for sales, with homes now taking a median of 23 days to sell—nearly two weeks longer than last year. This is a stark reminder of the headwinds the market faces, especially with mortgage rates climbing due to ongoing inflation concerns. The coming months will be pivotal; November and December data will provide a clearer picture of whether buyers can sustain activity at these higher rate levels. If buyer demand holds steady, the stage could be set for a strong spring market. However, if higher rates start to bite, we may see some softness heading into 2025.