Rising rents mean no shelter for Americans from inflationary storm

In Eric Farmelant’s nearly decade-long career as a Miami real estate broker, he had never seen renters engage in bidding wars for rental properties until the pandemic. coronavirus is fueling scorching demand for beachfront housing in Florida. He can no longer show four or five listings to his clients because many properties are rented out blindly.

“You see tenants depositing a year’s rent in advance to get their offer accepted,” said Farmelant, who works for Ibis Realty Group.

Rents, in turn, have risen nearly 40% since January 2021, according to Apartment List, indicating a broader trend that has gripped the country.

For real estate agents, double-digit rent increases have been a boon to business. For the Federal Reserve, they are one more hurdle in the central bank’s quest to tame the worst inflation problem in decades.

With little relief expected in the short term, economists warn that high rents will act as an accelerator, keeping upward pressure on inflation even as consumer price growth stagnates for other categories. This makes it all the more difficult for the US central bank to fight against soaring prices.

“It’s going to be hard to say ‘we’ve got inflation under control’ if you still have housing costs that keep rising,” said Sarah House, senior economist at Wells Fargo. She expects high rent inflation to persist at least through the end of the year, and despite some offsetting moderation in other goods and services, “this will complicate the task ahead for the Fed.”

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Senior officials pay particular attention to housing-related inflation, given that it is such a large component of overall inflation.

By some estimates, housing costs account for about a third of the consumer price index, which in June rose at an annual rate of 9.1 percent, according to the Bureau of Labor Statistics, in what was l fastest increase since November 1981. For the ‘core’ measure, which excludes volatile elements such as food and energy, is over 40%.

Compared to the same period last year, rents rose 5.8% after the strongest monthly increase since 1986 of 0.8%. Equivalent landlord rent, a measure of what landlords think their properties would rent, rose 0.7%. In total, shelter costs have risen 5.6% over the past 12 months, the highest since 1991.

The larger-than-expected acceleration reset expectations about how quickly headline inflation could moderate this year and how much more monetary policy tightening could be. The Fed has said it needs a sharp deceleration in monthly inflation data before it significantly slows the pace at which it raises interest rates.

The rent inflation forecast largely hinges on the trajectory of house prices, which have surged during the pandemic as people rethink their lives in a new era of working from home, seek out less dense locations and take advantage of lower rates. ultra-low mortgages. As more and more potential buyers were shut out of the market, they turned to rental options.

Now buyers are overpriced for a different reason. Home prices are starting to moderate after hitting another record high in June, according to data released Wednesday by the National Association of Realtors. But the cost of financing this leveraged purchase skyrocketed as the Fed raised interest rates.

According to Realtor.com, the gap between monthly homeownership costs and rents has widened by about 25 percentage points, or almost $500. In June alone, the NAR reported that sales of previously owned homes were down 5.4%, or 14% from a year earlier.

“People who have been shut out of the market for housing for sale are increasingly turning to the rental market, which is also driving up demand,” said Daryl Fairweather, chief economist at Redfin.

Coupled with the fact that rental prices track house price changes by around 18 months, Kathy Bostjancic, chief U.S. economist at Oxford Economics, said rent inflation may not moderate until second quarter of 2023.

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Economists such as HSBC’s Ryan Wang have revised their forecasts upwards, bringing year-on-year rent inflation down to 7% by early next year.

“New leases are contracted at much higher rent levels than before, leading to an increase in the overall universe of rents measured in the CPI,” he said.

Given the way the BLS calculates rent data, the broader effects of inflation may also take time to show up in official figures. Michael Pond, head of global inflation research at Barclays, estimates the lag could be between six and nine months.

In February, researchers at the Fed’s San Francisco branch estimated that current rental market trends would raise headline CPI inflation by an additional 1.1 percentage points in 2022 and 2023, or 0.5 points. percent relative to the central bank’s preferred inflation indicator, the Personal Consumption Expenditure Index. . So far, these predictions have held true.

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What could help ease some of these pressures is increasing housing supply, which the Biden administration is prioritizing. But economists and housing experts say those efforts do little to alleviate the immediate problem.

“We don’t have enough housing. Even if you build over half a million units,” said Danushka Nanayakkara-Skillington of the National Association of Home Builders. Skyrocketing material costs for builders are also being passed on to tenants, she said.

Real estate agents and property investors are most wary of a recession, which economists predict next year, as the Fed follows through on its “unconditional” commitment to restore price stability. For Tom Porcelli, an economist at RBC Capital Markets, housing is probably already “only at the start of a recession”.

“We expect a period of stagnant economic growth due to the interest rate hikes the Fed is making,” Redfin’s Fairweather added.

“It will reduce price growth for virtually everything, including rent. But it will just take a while for that to trickle down.

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