Rising rents mean Americans have no shelter from the inflation storm

In Eric Varmelant’s nearly decade-long career as a Miami realtor, he had never seen tenants engage in bidding wars over rental properties until the coronavirus pandemic spurred an intense demand for beachfront housing in Florida. It can no longer show four or five listings to clients because many properties are rented out invisibly.

“You see tenants making a year’s rent up front to get their offer accepted,” said Varmilant, who works for the ibis Realty Group.

Rents, in turn, are up nearly 40 percent since January 2021, according to the apartment listing, indicating a broader trend that has permeated the country.

For landlords, double-digit rent increases have been a boon for business. For the Federal Reserve, it represents another obstacle in the central bank’s quest to control the worst inflation problem in decades.

With little relief expected in the near term, economists warn that higher rents will act as an accelerator, maintaining upward pressure on inflation even as consumer price growth for other categories has stalled. It makes the US central bank’s job of tackling price hikes more difficult.

“It’s going to be hard to say ‘we have inflation under control’ if you still have shelter costs that continue to rise,” said Sarah House, chief economist at Wells Fargo. It expects massive rent inflation to continue until at least the end of the year, and despite some offsetting moderation in other goods and services, “that will complicate the task ahead for the Fed.”

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Senior officials pay close attention to housing-related inflation, as it is an important component of overall inflation.

By some estimates, shelter costs make up about a third of the consumer price index, which rose in June at an annual pace of 9.1 percent, according to the Bureau of Labor Statistics, the fastest such increase since November 1981. The “core” measure, which excludes volatiles such as Food and energy, it makes up more than 40 per cent.

Compared to the same period last year, rents are up 5.8 percent after the biggest monthly jump since 1986 of 0.8 percent. Owner’s equivalent rent, a measure of what homeowners think their properties will rent for, rose 0.7 percent. Altogether, shelter costs have risen 5.6 percent over the past 12 months, the highest since 1991.

The larger-than-expected acceleration has reset expectations about how quickly general inflation will moderate this year and how imminent monetary tightening may be. The Fed said it needs to see a clear slowdown in monthly inflation data before it significantly slows the pace of rate hikes.

The outlook for rent inflation hinges in large part on the trajectory of home prices, which have soared during the pandemic as people reorganize their lives in a new era of working from home, searching for less intense places and taking advantage of very low mortgage rates. As more potential buyers exit the market, they have resorted to rental options.

Now buyers are priced for a different reason. Home prices are beginning to moderate after hitting another record in June, according to data released by the National Association of Realtors on Wednesday. But the cost of financing this purchase through borrowing rose dramatically as the Federal Reserve raised interest rates.

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

“People who are being left out of the housing for sale market are increasingly turning to the rental market and that also increases demand,” said Daryl Fairweather, chief economist at Redfin.

Besides the fact that rents track house price changes by about 18 months, Kathy Bostancik, chief US economist at Oxford Economics, said rental inflation may not abate until the second quarter of 2023.

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Economists such as HSBC’s Ryan Wang revised their forecasts higher, cutting year-on-year rent inflation up 7 per cent by early next year.

He said, “New leases are being contracted at much higher rent levels than before, and this leads to increases in the general world of rents as measured in the consumer price index.”

Because of the way the BLS calculates rent data, the effects of broader inflation can take time to show up in the official numbers. Michael Bond, head of global inflation research at Barclays, believes the delay could be anywhere from six to nine months.

In February, researchers at the Federal Reserve Bank of San Francisco estimated that current rental market trends would increase overall CPI inflation by an additional 1.1 percentage points in both 2022 and 2023, or 0.5 percentage points to the central bank’s preferred inflation measure, an indicator Personal consumption expenditures. . So far, these expectations have held.

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What could help relieve some of these pressures is the increased supply of housing, which the Biden administration is prioritizing. But economists and housing experts say these efforts do little to mitigate the current problem.

We don’t have enough housing. Even if you’re building more than half a million units, Danushka Nanaykara-Skillington at the National Association of Home Builders said. She said the builders’ higher material costs are also passed on to tenants.

Real estate brokers and investors are more wary of a recession, which economists expect next year, as the Federal Reserve pursues its “unconditional” commitment to restoring price stability. For Tom Purcelli, an economist at RBC Capital Markets, it is already possible that housing is “on the start of a recession.”

“We are waiting for a period of sluggish economic growth due to interest rate increases by the Federal Reserve,” added Fairweather at Redfin.

This will lead to lower price growth for basically everything, including rent. But it will take some time for that to flow downwards.”

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