Housing and Inflation
Mortgage Rates declined Sharply Today
A few key points:
The Fed has been raising rates to slow inflation. Since housing is a key transmission mechanism for Fed policy, the housing market has slowed dramatically as the Fed raised rates (and mortgage rates increased).
The CPI report this morning contained some good news on inflation.
The BLS reported “The index for shelter contributed over half of the monthly all items increase”.
The BLS measure for shelter is seriously lagged and is likely behind the curve on the sharp slowdown in rents.
From the BLS: Consumer Price Index Summary
The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis, the same increase as in September, the U.S. Bureau of Labor Statistics reported today. … The index for all items less food and energy rose 0.3 percent in October, after rising 0.6 percent in September. …
The all items index increased 7.7 percent for the 12 months ending October, this was the smallest 12-month increase since the period ending January 2022. The all items less food and energy index rose 6.3 percent over the last 12 months.
Both CPI and core CPI were below expectations, and the year-over-year change is declining. Bond yields fell sharply this morning, and the 30-year mortgage rate dropped significantly to 6.67% from 7.25% yesterday (average top tier scenarios with zero points):
BLS Measure of Shelter
A key component of CPI is shelter. From the BLS, this table shows the relative importance of various components of shelter (about one-third of CPI):
There is a significant lag to BLS measures of shelter. Since the BLS measures include all leases - and most leases only renew annually - it is taking some time for the rent increases for new leases to impact the BLS measures of shelter. Here is a graph I post every month when I review rents.
Measures of new leases increased sharply in 2021 and have softened in 2022.
And here is a long-term graph of the various measures of rent.
Some people are expecting the measure of shelter to catch up with the jump in new leases (Zillow and Apartment List). Just last week, Fed Chair Powell said “there are some significant [rental] rate increases coming”:
So I start by saying I guess that the measure that's in the CPI and the PCE, it captures rents for all tenants, not just the new, not just new leases. And that makes sense actually because that, for that reason, that conceptually that is, that's sort of the right target for monetary policy. And the same thing is true for owners' equivalent rent which comes off of, it's a re-weighting of tenant rents. The private measures are of course good at picking up the, at the margin, the new leases and they tell you a couple things; one thing is, once you, I think right now, if you look at the pattern of that series of the new leases, it's very pro-cyclical, so rents went up much more than the CPI and PCE rents did. And now they're coming down faster. So but what you're, the implication is that there are still as people, as non-new leases rollover and expire, right? You still, they're still in the pipeline, there's still some significant rate increases coming. Okay? But at some point, once you get through that, the new leases are going to tell you, what they're telling you is there will come a point at which rent inflation will start to come down. But that point is well out from where we are now.
However, Rental housing economist Jay Parsons argues rental data will "cool faster” than the Fed expects:
And one of the best leading indicators for rents is the quarterly survey from the National Multifamily Housing Council (NMHC) that suggests higher vacancy rates and slower rent growth in the coming months.
The looser market conditions suggest higher vacancy rates and slower rent growth in the coming months. I’ll have a monthly update on rents.
My current view is inflation will ease quicker than the Fed currently expects.
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