Real Estate

Housing Inflation Cools to 5.5%, Yet Pressures Loom

Housing costs drive core inflation, rising at slowest annual rate in two years despite significant impact.

By Doug Elli

5/15, 11:44 EDT

Key Takeaway

  • Shelter costs, rising at the slowest annual rate since June 2022, still lead core inflation but show signs of moderation with a 5.5% increase over the past year.
  • Despite a slowdown in shelter cost increases, housing remains a significant inflation driver, accounting for over two-thirds of core inflation's annual rise.
  • The lag in reflecting actual rent decreases and potential future pressures from reduced housing project starts and increased immigration could challenge the Fed's inflation targets.

Moderating Housing Costs Amid Inflation Concerns

April's financial landscape was marked by persistently high housing costs, which continued to be a significant driver of core inflation, despite showing signs of moderation. According to the Bureau of Labor Statistics, the shelter component of the Consumer Price Index (CPI), primarily consisting of rent and homeowners' equivalent rent (OER), rose by 0.4% in April, mirroring March's increase. This rise in shelter costs, which saw a 5.5% increase over the previous year, contributed to over two-thirds of the annual increase in core inflation, underscoring the substantial impact of housing on the overall inflationary environment. This scenario, as highlighted by Ryan Sweet, chief US economist at Oxford Economics, suggests a need for patience, given the lag between newly signed leases and their reflection in the CPI.

The Lag in Reflecting Rent Moderation

The moderation in apartment rents, which has occurred more quickly than CPI data suggests, points to a disconnect between real-time market conditions and inflation metrics. The Bureau of Labor Statistics' biannual collection of rent data introduces a delay in capturing the true state of rent inflation, a factor that economists like Austan Goolsbee, Chicago Fed president, and Omair Sharif, founder of Inflation Insights, find significant. Sharif, in particular, views the recent 0.3% monthly rent increase as a return to pre-Covid norms, indicating a potential easing of housing inflation pressures. However, the multifaceted impacts of COVID-19 and a softer economy, as noted by Oren Klachkin of Nationwide, suggest that the full effect of these moderations on overall inflation may not be realized until early next year.

A Complex Outlook for Housing Inflation

Despite the current moderation in housing costs, the outlook remains complex. The record addition of new apartment supply has been a key factor in tempering market rents. Yet, industry experts like Jay Parsons from Madera Residential warn of potential rent accelerations due to challenges in developing new apartments, a consequence of rising rates that have significantly reduced multifamily starts. This imbalance between demand and supply could exert upward pressure on inflation, complicating the Federal Reserve's efforts to manage housing costs. Additionally, increased immigration could further strain the housing stock, as noted by Don Rissmiller of Strategas Research Partners, potentially exacerbating inflationary pressures.

Navigating Inflation with a Focus on Housing

The intricate dynamics of housing costs within the broader inflationary landscape present a critical challenge for policymakers and market observers. The recent data, while showing signs of moderation, 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 the Federal Reserve and other stakeholders navigate these waters, 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.'"