The latest Consumer Price Index (CPI) data released by the Bureau of Labor Statistics on Wednesday indicates a marginal easing in the growth of housing costs for the month of August. The shelter component of the index rose by 0.3% compared to the previous month. This represents a slight slowdown from the 0.4% month-over-month increases observed in both July and June.
Year over year, the shelter index experienced a 7.3% increase, marking the lowest annual rise since November 2022. Nevertheless, it remains a significant driver in the monthly core inflation figures, which came in slightly higher than anticipated. This year-over-year spike in the index still surpasses the 2.88% average recorded since 2003.
Jonathan Miller, president and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm, emphasized that ideally, shelter inflation should be at or below 3%. He attributed the current trends to the Federal Reserve’s prolonged period of low interest rates during the pandemic, which has disproportionately influenced the housing market.
The overall CPI inflation demonstrated a 0.6% monthly increase and a 3.7% annual surge, slightly exceeding economists’ predictions. The Federal Reserve’s target for annual inflation stands at 2%.
The shelter index, which accounts for roughly one-third of the CPI calculation, comprises four components: rent, owner’s equivalent rent (OER), lodging away from home, and household insurance. OER, which indirectly reflects home price growth, contributes the most to the shelter index, making up 73.8% of the calculation, followed by rent at 21%.
Both of these measures have contributed to sustained high shelter costs. In August, OER recorded a monthly gain of 0.4%, while rental prices saw a 0.5% inflation increase on a seasonally adjusted basis. However, it’s important to note that these measures operate on a lag and may not entirely reflect real-time market conditions.
Rent, for instance, has rebounded to the previous year’s record-high levels after experiencing declines in the third and fourth quarters of the previous year, albeit at a more moderate pace.
Lawrence Yun, the chief economist at the National Association of Realtors, noted that while rent increased by 7.3% from a year ago in August, the monthly gain was the slowest in two years, indicating a more tempered upward trend. This suggests that a significant component of overall inflation may stabilize in the coming months.
In August, housing costs saw a more moderate increase, with the median sales price rising by 4% compared to the previous year, marking a notable slowdown from the 7% surge in August 2022 and the 14% spike in August 2021, as reported by Redfin.
Interestingly, efforts by the Federal Reserve to combat inflation may inadvertently bolster home prices and rent. As the Fed raised its benchmark rate to address housing inflation, mortgage rates followed suit, surging from 3.22% at the beginning of 2022 to over 7% presently. This has dissuaded sellers from listing their homes for sale, as they aim to retain their favorable mortgage rates obtained during the pandemic.
This has resulted in a reduced number of homes on the market, causing historically low inventory levels and subsequently driving up prices for available properties. Forecasts indicate that prices will remain elevated as long as inventory remains constrained.
Selma Hepp, CoreLogic’s chief economist, cautioned that ongoing inflationary pressures and the Fed’s focus on combating it may keep mortgage rates elevated, potentially staying above 6% through the year’s end. This situation could continue to impede potential homeowners who are unwilling to part with their advantageous mortgage rates and sell their properties.
Elevated mortgage rates and limited inventory have also led budget-conscious buyers back into the rental market. While this market segment is also facing supply challenges, the situation is less acute as more rental units come online. Builders are racing to add more single-family homes to address the needs of buyers.
Lawrence Yun emphasized the critical importance of expanding supply to broaden access to homebuying for a wider demographic. He noted that increased homebuilding could temper price growth, while limited construction could lead to home price appreciation outpacing income growth.
In conclusion, the August data on housing costs underscores the ongoing challenge of balancing inflationary pressures with the need for affordable shelter. While there was a marginal easing in growth, experts emphasize the imperative of addressing this critical issue to ensure sustainable economic stability.
Source: Yahoo Finance
