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Next week will be quiet on the data front but should give us time to digest the deluge of concerning inflation data that landed this past week. We get housing data on Tuesday, and both building permits and starts are expected to remain weak in the face of high interest rates and elevated input costs. Building permits are expected to move largely sideways at 1408k, and housing starts are set to tick up slightly to 1315k.
What matters most for the US housing market is affordability and the current rate backdrop is derailing any prospect for improvement. The sector has been stuck in a rut, mostly subtracting from growth since mid-2024, and we continue to expect that drag to persist. US bond yields remain elevated, with 5s and 10s at their highest level since the Financial Crisis and 30-year yields at their highest since 2004. The upside surprise in September CPI points to early signs of an energy-price spillover, and the concern is that the report did not fully capture the risks stemming from both tariffs and higher energy prices. We saw this emerge in the PPI data, which posted the single highest month-over-month increase in four years. More importantly, freight prices — exceedingly elevated — illustrate that more pressure is coming in the pipeline to CPI.
On top of the immediate inflation risks coming from energy and tariffs, we expect limited building activity and higher financing costs to disincentivize builders, weighing on the supply of new homes. Problematically, a supply-constrained housing market can filter back through inflation. Housing is currently contributing 1.1 percentage points (nearly half) to the year-over-year pace of core CPI– and despite higher mortgage rates, home prices have continued to rise – which is not typical. With supply this tight, prices are unlikely to decline, a mechanism that has intuitively worked in the past, meaning we expect sticky housing prices for CPI over the next two years.
About the authors:
Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s US economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.
Carrie Freestone is a Senior US Economist at RBC. She is responsible for generating RBC’s US economic forecasts across GDP, employment, and inflation, and providing macro commentary through publications, presentations, and the media.
Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.
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