Real Estate

Housing Inflation Cools to 5.5%, Slowest in 2 Years Amid Fed Watch

Housing costs rise at slowest rate in two years, yet still push core inflation up, posing a nuanced challenge for the Fed.

By Tal Alexander

5/15, 16:43 EDT

Key Takeaway

  • Shelter costs, the largest contributor to core inflation, rose at the slowest annual rate in two years in April, signaling potential moderation.
  • Despite a slowdown, housing remains a central inflation concern, with economists noting a lag between actual rent changes and CPI measurements.
  • The balance between new apartment supply and demand could challenge future inflation rates, especially as multifamily construction starts have significantly decreased.

Housing Inflation: A Moderating Yet Persistent Challenge

April's economic data revealed a nuanced picture of the U.S. housing market, with housing costs continuing to exert significant upward pressure on core inflation, albeit at a moderating pace. The Bureau of Labor Statistics reported a 0.4% increase in the shelter component of the Consumer Price Index (CPI) for April, mirroring March's gain and marking a 5.5% rise over the past year. This is the slowest annual increase since June 2022, down from a peak of 8.2% in March of the previous year. Despite this moderation, shelter costs accounted for over two-thirds of the annual increase in core inflation, which excludes food and energy prices, underscoring the substantial role housing continues to play in the broader inflationary landscape.

The Disconnect Between Market Rents and CPI Data

The moderation observed in apartment rents, which has occurred more quickly than CPI data suggests, highlights a significant lag in the reflection of real-time rent adjustments within inflation metrics. This delay, attributed to the Bureau of Labor Statistics' biannual rent data collection methodology, has prompted economists and market observers to call for patience. Notably, Ryan Sweet of Oxford Economics and Austan Goolsbee, president of the Chicago Fed, have pointed out the extended timeline required for newly signed leases to impact the shelter component of the CPI. This situation has led to a cautious optimism among some analysts, who anticipate that a more accurate reflection of rent moderation could contribute to an easing of housing inflation pressures in the near term.

Future Pressures and the Fed's Inflation Challenge

Despite current signs of moderation, the outlook for housing inflation remains complex. Industry experts warn of potential future pressures, including the impact of reduced housing project starts and increased immigration on the housing stock. Jay Parsons of Madera Residential highlighted the ironic scenario where rising rates have made it more difficult for developers to initiate new apartment projects, leading to a significant drop in multifamily starts. This imbalance between demand and supply could exert upward pressure on inflation, posing a challenge for the Federal Reserve's efforts to manage housing costs effectively. Furthermore, increased immigration could strain the housing stock further, as noted by Don Rissmiller of Strategas Research Partners, potentially exacerbating inflationary pressures.

Navigating the Inflationary Impact of Housing Costs

The intricate dynamics of housing costs within the broader inflationary landscape underscore the critical challenge facing policymakers and market observers. While recent data show signs of moderation, they also highlight the potential for renewed pressures in the housing market. This situation demands a nuanced understanding of the factors at play, including the lag in CPI's reflection of rent changes, the impact of new apartment supply, and the broader economic influences of COVID-19 and immigration trends. As stakeholders navigate these challenges, the balance between fostering economic growth and controlling inflation will remain a pivotal concern.

Street Views

  • Ryan Sweet, Oxford Economics (Neutral on housing inflation):

    "Housing remains the key source of our inflation problems but disinflation is still in the pipeline... More patience than previously thought appears to be needed as the lag between newly signed leases and the shelter component of the CPI have been longer than previously thought."

  • Austan Goolsbee, Chicago Fed president (Cautiously Optimistic on housing inflation):

    "We've been saying for some significant time that housing inflation is about to come down. If that happens at the rate at which we think, I think we will start to see overall improvement and it will be fairly clear that there's an optimistic lane that we could ride overall inflation back toward 2%."

  • Omair Sharif, Inflation Insights (Optimistic on recent report regarding housing costs):

    "The most encouraging aspect of this report... a number [0.3% monthly rent increase] that resembles the pre-Covid days."

  • Oren Klachkin, Nationwide (Neutral/Long-term Optimistic on shelter's impact on overall inflation):

    "COVID-related impacts and a softer economy will see shelter's impact on overall inflation bottom out early next year... Those two factors will help lower shelter inflation toward an underlying pace that is more within the line of what we saw in 2018 and 2019," which was around 2.5% to 3%.

Management Quotes

  • Jay Parsons, Madera Residential:

    "The reason for [potential rent acceleration], quite ironically, is that as rates have gone up, it's been much more difficult for developers to build more apartments... Multifamily 'starts have absolutely plummeted,' which in turn could lead to 'more demand than supply putting upward pressure on inflation because we're not starting many new housing projects right now.'"