Here's why it may take a while for housing inflation to cool

Here’s why it may take a while for housing inflation to cool

An ‘open house’ flag is displayed outside a single family home on September 22, 2022 in Los Angeles, California.

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There are signs that inflation could fall further in the coming months, but housing threatens to dampen any improvement.

The consumer price index, a key barometer of inflation, rose 7.7% in October from a year ago. While still quite high by historical standards, this annual reading was the lowest since January.

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The monthly increase was also lower than expected, raising hopes that stubbornly high inflation and the negative impact it has had on consumer wallets may ease.

Yet the cost of housing jumped 0.8% in October — the largest monthly gain in 32 years. This may seem counterintuitive at a time when many observers have declared the United States to be in a “housing recession.”

But housing inflation – as reflected in the CPI, at least – is likely to remain elevated for several months to a year given its importance to household budgets and the intrinsic dynamics of rental and housing markets. , the economists said.

“As the housing market cools, this category will also soften, but we may have to wait until next year before it significantly dampens headline inflation,” said Jeffrey Roach, Chief Economist at LPL Financial.

Housing is the number one item of household expenditure

The U.S. Bureau of Labor Statistics, which publishes the CPI report, divides the shelter category into four components: rent, out-of-home accommodation (e.g., hotels), tenant and household insurance, and homeowners’ equivalent rent. residential homes.

Rent and “owners’ equivalent rent” are by far the most important.

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The latter tries to put the owners on par with the tenants. That essentially reflects what homeowners would pay themselves to rent their homes, said Cristian deRitis, deputy chief economist at Moody’s Analytics.

Housing is the largest expense item for the average consumer. The CPI’s overall weighting reflects the following: Housing accounts for 33%, the bulk of all categories. Housing therefore has an outsized impact on headline inflation from month to month.

The shelter category grew by 6.9% over the past year.

Rental and housing markets are cooling

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Lower demand has led to lower or moderate home and rental prices in many parts of the United States

New U.S. housing listings in the month to Nov. 6 were down 17.5% from the same period a year earlier, according to Redfin, a real estate agency. The typical sale price, $359,000, is down more than 8% from its high of $392,000 in June, according to Redfin.

Demand for mortgages fell as rates steadily climbed to a recent high of over 7%, although rates fell sharply last week.

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Meanwhile, rent inflation has slowed in 2022 from its blistering pace last year, according to data from Zillow.

Americans paid an average market rent of $2,040 as of Oct. 31, according to Zillow’s Observed Rent Index, which is seasonally adjusted.

This rental price increased by 0.31% compared to the previous month, on September 30. But the pace of that growth has slowed for four consecutive months. By way of comparison, rents had jumped by around 1% over the month from the end of May to the end of June. Rent inflation reached 2% per month in July and August 2021, according to data from Zillow.

Why house prices are lagging

The “housing” CPI has historically lagged house price changes by four quarters, suggesting that housing “will continue to exert upward pressure on headline inflation through the first half of the year. 2023,” according to deRitis.

The lag effect is largely due to the time it takes for leases to transition into a new contract. Landlords typically renew leases every 12 months, meaning current price dynamics won’t be reflected in new contracts for another year.

In this sense, housing is somewhat of an exception among the other CPI categories. Consumers are not willing to pay the same price for chicken or eggs for a whole year, for example.

“Housing has unique aspects,” deRitis said.

And rent tends to be “sticky,” economists say — meaning the total dollar amount of monthly rent typically doesn’t go down; it tends to stay the same or increase with each new lease.

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