Housing costs bucking overall cooling trend
Market’s persistent inflation stymies Fed officials looking to lower rates
The Federal Reserve may have a housing problem. At the very least, it has a housing riddle.
Overall inflation has eased substantially over the past year. But housing has proved a tenacious — and surprising — exception. The cost of shelter was up 6% in January from a year earlier and rose faster on a monthly basis than in December, according to the Labor Department. That acceleration was a big reason for the pickup in overall consumer prices last month.
The persistence of housing inflation poses a problem for Fed officials as they consider when to roll back interest rates. Housing is by far the biggest monthly expense for most families, which means it weighs heavily on inflation calculations. Unless housing costs cool, it will be hard for inflation as a whole to return sustainably to the central bank’s target of 2%.
“If you want to know where inflation is going, you need to know where housing inflation is going,” said Mark Franceski, managing director at Zelman & Associates, a housing research firm. Housing inflation, he added, “is not slowing at the rate that we expected or anyone expected.”
Those expectations were based on privatesector data from real estate websites such as Zillow, Apartment List and other private companies showing rents have barely been rising recently and have been falling outright in some markets.
For homebuyers, the combination of rising prices and high interest rates has made housing increasingly unaffordable. Many existing homeowners, on the other hand, have been partly insulated from rising prices because they have fixed-rate mortgages with payments that don’t change from month to month.
Housing prices and mortgage rates don’t directly show up in inflation data, however. That’s because buying a home is an investment, not just a consumer purchase like groceries. Instead, inflation data is based on rents. And with private data showing rents moderating, economists have been looking for the slowdown to appear in the government’s data, as well.
Federal Reserve officials largely dismissed housing inflation for much of last year, believing the official data had simply been slow to pick up on the cooling trend apparent in the private data. Instead, they focused on measures that exclude shelter, an approach they saw as better reflecting the underlying trends. But as the divergence has persisted, some economists inside and outside the Fed have begun to question those assumptions. Economists at Goldman Sachs recently raised their forecast for housing inflation this year, citing rising rents for single-family homes.
The stubborn nature of housing inflation isn’t a total mystery. Economists knew it would take time for the moderation in rents seen in private-sector data to make its way into the Labor Department’s official consumer price index.
There are two reasons for that delay. The first is technical: The government’s data is based on a monthly survey of thousands of rental units. A given unit is surveyed only once every six months, however. So if an apartment is surveyed in January and the rent goes up in February, that increase won’t show up in the data until the apartment is surveyed again in July. That causes the government data to lag behind conditions, especially during periods of rapid change.
The second reason is conceptual. Most private indexes include rentals only when they get new tenants. But the government aims to capture housing costs for all tenants. Because most leases last a year or longer, and because those who renew their leases often get a discount relative to people renting on the open market, the government’s data will typically adjust more gradually than the private indexes.
The public and private data should eventually converge. But it isn’t clear how long that process will take. The rapid rise in rents in 2021 and 2022, for example, led many people to stay put rather than wading into the red-hot rental market. That, among other factors, may have made it take longer than usual for market rents to filter into the government data.
There are signs that a slowdown is underway. Rents have risen at an annual rate of less than 5% over the past three months, down from a peak of close to 10% in 2022. Private data sources disagree on how much rental inflation still has to ease, but they agree that the trend should continue.
“For the most part, they’re all saying the same thing, which is that rent inflation has moderated significantly,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, an economic research firm.