After several months of slower growth, inflation in housing services has picked up the pace in September. While this might seem concerning, it’s important to consider that the lagging data might not provide the complete picture.
According to data released on Thursday, the Consumer Price Index, a government measure of inflation, rose a seasonally adjusted 0.4% in September. The Bureau of Labor Statistics indicates that more than half of this overall gain can be attributed to the index for shelter, which includes measures of rent and rent-equivalents.
While prices in September saw a slower pace of growth compared to August across various categories, this was not the case for shelter costs. Prices in this category increased by a seasonally-adjusted 0.6% from the previous month, marking the highest monthly increase since May. Furthermore, the shelter index was 7.2% higher compared to the same period last year.
Specifically, rent of primary residence, a subcategory that tracks the cost of rent, showed a seasonally adjusted 0.5% gain, mirroring the increase observed in August. Rent of primary residence was also 7.4% higher compared to one year ago.
Moreover, owners’ equivalent rent, which measures what a homeowner would have to pay to rent their home, experienced a 0.6% increase, surpassing August’s 0.4% growth. Owners’ equivalent rent also stood at 7.1% higher compared to September 2022. Some other subcategories within the shelter category, such as lodging away from home and tenants’ and household insurance, also saw notable gains.
In conclusion, inflation in housing services has shown an upward trend in September. While this suggests potential challenges ahead, it’s important to consider the broader context and understand that some aspects of the data may not be immediately evident.
Housing Market Inflation: Will the Deceleration Be Short-Lived?
If September’s reading is an indication, the anticipated slowdown in housing inflation has not materialized, which is disappointing news for inflation watchers, economists, and the Federal Open Market Committee. Many expected the impact of higher interest rates on the housing market to gradually cool down housing services inflation.
Earlier this year, there was a deceleration in shelter inflation gains. However, the recent surge in housing prices coupled with a limited supply of homes for sale may result in upward pressure on comparable rents. The Federal Reserve is fully aware of this risk. According to the minutes from September’s FOMC meeting, some participants noted the resilience of housing demand despite higher interest rates. They also recognized the potential impact of a strong housing market on shelter inflation, mentioning it as one of the upside risks to inflation.
Nevertheless, it is important to remember that one month’s data does not establish a trends. As economist and Chief Investment Officer of Bleakley Financial Group, Peter Boockvar, pointed out, September’s increase in shelter inflation exceeded actual rent gains. Boockvar explained that in reality, blended rental rate increases are around 3-4%, with new leases seeing an increase of about 1-2% and rental rollovers averaging 4-5%.
It is worth noting that the shelter gauge used by the government can be somewhat disconnected from more immediate developments in the housing market. According to previous reports by , government data on rents can lag behind private rent indicators by up to 12 months. For instance, Zillow’s measure of asking rents showed a modest increase of 0.2% in September and a 3.2% increase compared to the previous year.
Overall, while there are concerns about the potential long-lasting effect of housing inflation, it is essential to consider the broader context and not solely rely on one month’s data. The housing market remains resilient despite higher interest rates, making it a crucial factor to monitor going forward.
Rent Prices Impacting Consumer Prices
Rising Rents Create Challenges for the Fed
Lawrence Yun, the National Association of Realtors’ chief economist, points out that the relentless increase in rent prices is a major factor that is preventing consumer prices from being fully controlled. This is also why the Federal Reserve is hesitant to consider cutting interest rates.
Anticipated Cooling in Rent Prices
Yun expresses optimism that rent growth will eventually slow down due to the construction of multiple new apartments. He predicts that inflation and interest rates will be lower in the coming year.
Impact on Mortgage Rates
Immediate Implications for Prospective Buyers
The housing-related portion of the inflation report has immediate consequences for potential buyers. It is likely to result in higher mortgage rates today. The 10-year Treasury yield, which often influences mortgage rates, increased by 0.016 percentage point to reach 4.612% on Thursday morning, according to Dow Jones Market Data.
Climbing Mortgage Rates
In recent weeks, mortgage rates have been climbing as market participants anticipate the Federal Reserve to maintain higher rates in the long run. Last week, the average 30-year fixed mortgage rate reached 7.49%, its highest level since 2000 as reported by Freddie Mac.
Negative Impact on the Housing Market
Higher mortgage rates have negatively affected housing market sentiment and are expected to drive down home sales. Economists predict that existing homes sold in September were at a seasonally adjusted annual rate of 3.88 million, which would be the slowest pace since October 2010.