Housing Inflation Recedes, Paving the Way for More Rate Cuts

Commentary

Last Tuesday, the Federal Open Market Committee (FOMC) minutes from its December meeting were posted, signaling that at least one additional key interest rate cut is anticipated if inflation cools in the upcoming months. Although there were divisions within the FOMC regarding the Fed’s policies, a new Fed Chairman will be nominated soon, and so a push for more key interest rate cuts is likely in 2026.

Furthermore, deflation is a real possibility in the upcoming months, due to lower shelter costs (owners’ equivalent rent), lower crude oil prices, and the fact that the U.S. is importing deflation from China and other troubled economies. If this deflation materializes, the FOMC will have to act quickly and slash key interest rates in the next few months, and we’re already seeing some evidence of this housing deflation:

1. According to the Intercontinental Exchange, U.S. condominium prices declined 1.9% in September and October, and over 25% of condos have fallen below their original sale price in nine metro areas.
2. The National Association of Homebuilders announced existing home sales rose 3.3% in November, as fixed mortgage rates have declined to 6.3%, which will stimulate more home sales.

The biggest news last week came from the rising chances for peace in several regions. If so, this could lift the markets to new heights and promote rising global economic growth.

Here are the most important developments recently and what they mean:

– Decisive action by the U.S. is expected to ensure low crude oil prices for decades as major U.S. energy companies join Chevron and help significantly boost Venezuelan crude oil production.

– There are also large protests in Iran over its deteriorating currency and oppression of its citizens. Iran’s rial has dropped 60% in value since June, when it launched missiles into Israel. These large protests may result in a leadership change, which would be a welcome development, since Iran’s president recently said that the country was at war with Europe, Israel, and the U.S., which is not the sentiment of many Iranian citizens.

– Despite all the international distractions, the Consumer Electronics Show (CES) in Las Vegas this week is expected to remind investors that AI and technology are leading overall U.S. economic growth. The robotics displays are expected to be especially popular, along with massive televisions that are getting cheaper every year. The U.S. is the world’s technology leader, but China is also very innovative and a serious competitor.

– Speaking of competition, Tesla announced that it sold 418,227 vehicles in the fourth quarter. Tesla sales declined to 1.64 million electric vehicles (EVs) in 2025, down 8.4% from 1.79 million EVs in 2024. This is the second straight year that Tesla’s EV sales have declined. China’s BYD is now the EV sales leader, and its sales surged 28% in 2025 to 2.26 million. BYD’s expansion in Europe and throughout Latin America has been very successful and has clearly hindered Tesla sales. However, Tesla investors seem more obsessed now with the Robotaxi and Optimus robots, so the stock has been remarkably resilient.

– There is no doubt that my 5% GDP growth prediction on Fox Business recently raised some eyebrows. I am expecting 5% annual GDP growth to emerge no later than the second quarter. International companies are now being forced to onshore more in America to avoid tariffs. This is happening now in the automotive and aerospace industries as well as the pharmaceutical industry. Of course, the data center boom is still accelerating and leading U.S. GDP growth due to rising order backlogs. Due to “drill baby, drill,” the U.S. has an abundance of natural gas and is leading the world on data center developments, thanks to Bloom Energy (BE) as well as GE Vernova (GEV), which can provide fuel cells and turbines to data centers with a direct natural gas supply and effectively avoid the electric grid.

– Residential investment was a 5.1% drag on GDP calculations in the second and third quarters. One of the keys to improving GDP growth moving forward is to shore up residential real estate markets, which remain weak due to high mortgage rates, higher insurance costs, as well as a supply glut in many key markets.

– Another reason the Fed needs to cut key interest rates is that the Institute of Supply Management (ISM) announced that its manufacturing index declined to 47.9 in December, down from 48.2 in November. This is the 10^th consecutive month that the ISM manufacturing index has been below 50, which signals a contraction. ISM reported that only 2 of the 17 industries surveyed reported expanding in December, which were Electrical Equipment, Appliances & Components, as well as Computer & Electronic Products. Clearly, data center demand is helping boost orders for these two industries.

– President Trump is anticipated to nominate a new Fed Chairman in January who will end the Fed’s restrictive policy and be much more pro-business. If Kevin Hassett, currently the head of the Council of Economic Advisors, becomes the next Fed Chairman, we will have an economic cheerleader leading the Fed, which will be very exciting.

In summary, get ready for 5% GDP growth as the U.S. economy explodes to the upside. The stock market is now characterized by the strongest sales growth in three years, and earnings are growing at the fastest pace in four years. Furthermore, earnings surprises in the previous quarter were running at a fast pace in four years, which is why the analyst community has been revising its consensus earnings estimates steadily higher. Finally, the Fed will be cutting key interest rates further, and if deflation materializes, the Fed will likely pick up the pace of its key interest rate cuts. As always, our fundamentally superior stocks are locked and loaded for another stunning announcement season, so I recommend that you hang on and enjoy the ride.

*Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.