ECONOMY A third of consumer spending goes to housing fig. 4HOUSING AS % OF TOTAL CONSUMER SPENDING 36% 34% 32% 30% be entering a new regime as rents across the country are showing signs 28% of abating. During this transition 1986 1992 1998 2004 2010 2016 2022 period for services prices, the coming Source: LPL Research, Bureau of Labor Statistics 11/15/22 year could be the time when inflation is convincingly decelerating closer to the Fed’s long-run target of 2%. HOUSING MARKET SHOULD The hybrid work environment If inflation in 2022 was about BEGIN TO NORMALIZE and the corresponding interest to supply constraints, then inflation The housing market is still move to areas with lower cost of in 2023 could center on demand normalizing in response to an living created an imbalance in the constraints. For the past year, economy under pressure from higher housing market, especially during the supply-related problems contributed borrowing costs, nagging inflation, trough in mortgage rates. Regional more to inflation than demand- and uncertainty about future variations will likely remain as related imbalances. China’s Fed activity. Slowing residential geographic reshuffling continues. zero-COVID-19 policy was one investment will create a drag on In 2023, the potential for more multi- of the biggest glitches in supply economic growth at the start of 2023, family dwellings should help bring chains as metro areas and ports but demographics of Millennials and the demand and supply for rentals were shuttered by the Chinese Generation Z could provide some into balance, while more rentals and government. However, things may support for housing demand later in normalizing house prices should be on the verge of changing as the year. Nevertheless, in the near ease inflation. supply and demand get into balance term, housing demand will likely fall throughout 2023, and as inflation further in the coming months, putting INFLATION SHOULD BECOME likely becomes more demand driven downward pressure on median prices. CONVINCINGLY SOFTER and less supply driven. This is Housing plays a significant role Investors and central bankers will positive for policymakers because in consumer spending and investors likely enter 2023 with a slightly monetary policy tools do not work should monitor the housing market different trajectory for inflation, on supply shocks but rather, only on as a bellwether for the health particularly services inflation. In demand; thus, these tools are now of the consumer. Consumers recent months, durable goods prices more relevant than they were when spend roughly 34% of their total have clearly decelerated—and in inflation was primarily from supply spending on housing [Fig. 4], so a some cases, outright declined—but bottlenecks. So as supply constraints decline in housing-related costs services prices have been stubbornly ease and as Fed tools become more should give consumers more for accelerating as rent prices and health impactful, we could see the rate of discretionary spending. services rose. We could potentially inflation decelerating further in 2023. LPL RESEARCH