Housing inflation remains stubbornly high Even if the overall U.S. economy experiences inflation Has cooled down significantly from peak levels during the pandemic.
Its slow and painful decline is a major obstacle to sustaining economic growth. consumer price index Economists said the move was back to policymakers’ goals.
Joe Seydl, senior market economist at J.P. Morgan Private Bank, explained, “We view this as the last step before CPI normalization.”
housing At 36% of the CPI index, it is by far the largest share relative to other categories such as food and energy, as it is the largest expenditure for the average household. Therefore, changes in home prices have a huge impact on inflation data.
At a high level, “housing” inflation is a measure of U.S. rental prices, said Jessica Lautz, deputy chief economist at the National Association of Realtors.
But the way the Bureau of Labor Statistics calculates these prices means that the housing inflation index lags behind trends in the immediate rental market (as explained in more detail below).
Why CPI safe-haven inflation is slowly falling
Economists say housing inflation is receding more slowly than expected.
According to CPI, the annual rate dropped from a peak of around 8% in early 2023 to 5.2% in June 2024 data. Current levels are about 2 percentage points above the pre-pandemic baseline.
“(Shelter) is already moving in the right direction,” said Olivia Cross, North America economist at Capital Economics. “It’s moving faster than anyone really expected. Much slower.”
This dynamic seems at odds with the current state of the rental market.
According to the Bureau of Labor Statistics (BLS), annual inflation for new rental contracts has plummeted to 0.4% in the first quarter of this year from a record high of about 12% two years ago, below the pre-pandemic baseline data.
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Economists say the reason for the slow pace of housing growth in consumer price index (CPI) data depends largely on the way the federal government builds its index of housing inflation.
The government’s approach means changes in housing CPI readings are delayed relative to changes in the current rental market.
“What we’re seeing now is that there’s a big lag,” Fed Chairman Powell explain in June. He added that it could take “a few years” for CPI readings to reflect the latest developments in the rental market.
“When the Fed looks at what’s going on with inflation, they’re very aware of concerns about shelter delays and take that into consideration when deciding how to respond to inflation,” said Selma Hepp, chief economist at CoreLogic.
How CPI Reflects Home Ownership Rates
JPMorgan’s Seidel said the housing inflation index is designed to measure the average cost of housing in the U.S. economy. Its two main components are rent and “owner’s equivalent residential rent.”
Assessing changes in expenses for renters who pay monthly rent to their landlord is simple.
But most Americans are homeowners. For them, calculus is more challenging: Bureau of Labor Statistics consider A housing unit is owned as an investment rather than a commodity for consumption.
(Shelters) are already moving in the right direction. It’s moving much slower than anyone really expected.
Olivia Cross
North America Economist at Capital Economics
Regular costs incurred by homeowners – such as mortgage payments, property taxes, real estate fees, most maintenance and all improvement costs – are considered “capital” costs, rather than consumption. They don’t fit neatly into the Consumer Price Index basket, which measures changes in the prices of goods and services consumed by Americans.
“In terms of the CPI, (housing) doesn’t mean the cost of buying a home,” NAR’s Lautz said.
The U.S. Bureau of Labor Statistics uses the Owner Equivalent Rent (OER) category to level the playing field between homeowners and renters. it measure According to the Bureau of Labor Statistics, “the value that a homeowner can obtain by renting out a good (i.e., a home) rather than using it himself.”
The BLS has used the framework since 1987, and the agency explain.
Powell said in June that “many countries around the world do this” when measuring inflation by classifying rental values as owned homes.
How the BLS constructs a housing index
Seydl said because rents typically do not change from month to month, the government builds the CPI Housing Index by sampling a “staggered sample” of renters and homeowners.
It divides the sample into six groups, and Investigate each Staggered every six months. For example, House A votes in January and July, House B votes in February and August, and so on. It aggregates price changes into its overall housing index.
Economists said the index moved slowly and with delays due to the staggered nature of the data.
“What we’re seeing in the CPI data was happening nine to 12 months ago,” said CoreLogic’s Hepp.
Experts say housing inflation should continue to slow as it catches up with the trend in new rental contracts and, overall, as more rental units become available.
“We’re going to continue to see some slowing or deceleration in rents,” Hupp said.
She said rent prices have soared as demand has outstripped supply and rental prices have increased during the pandemic.
“One of the reasons rent growth is slowing is because of more multifamily construction,” Lautz said. “It’s filling more demand that’s very tight.”
