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Housing Inflation Will Keep US CPI Elevated

Maybe you saw our piece in the Financial Times a few weeks ago (“No Shelter for the Fed”, March 14, 2022): we argued that the shelter component in the US Consumer Price Index is currently understated due to its “laggy” survey-based methodology. We were observing double-digit inflation in both single-family home prices, and in apartment REIT rent rates. At the same time, the shelter component increase in the CPI release has been coming in at under 5%, as illustrated on the chart below.  

(public chart viewer link)

The higher-frequency data since we published the piece continues to indicate double-digit housing inflation, which we expect will be working itself into the CPI regardless of what happens to the more volatile components, like energy (see our “Higher for Longer” piece predicting high oil and gas prices back from October 2021 due to the dramatic decrease in capex spend). 

For example, several Residential REITs presented at conferences in March, and guided to 12-16% “blended” (new and renewal leases) rate increases for Q1 2022 (see our Snippets “Side by Side” view video), 

Redfin’s data also continues to be torrid: record high condo prices, record high single-family prices, 15% average rent price increases, record number of bidding wars in February 2022, and similar. 

Potentially counteracting the growth in prices has been the recent increase in mortgage rates: while low by historical standards, we recently saw the standard 30-year rate approaching 4.5%. We say “potentially” because US housing is underbuilt especially when considering the millennial generation “bump”, and, additionally, a larger percentage of home buyers are investors less dependent on traditional mortgage financing: the National Association of Realtors data points to 22% of buyers being investors, up from 15%, and cash offers being almost one third of transactions, also up considerably from a year ago.

(public chart viewer link)

So, without a major increase in housing supply on the horizon, and higher rates possibly being less effective than before, we continue to expect that the double-digit housing inflation rate to persist, and this will keep CPI elevated for a long period of time, as outlined in our FT piece.

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