Most economists thought year-over-year rent inflation would have come down more than it has. Let’s investigate what they have to say now.
The Wall Street Journal comments Stubbornly High Rents Prevent Fed From Finishing Inflation Fight
Stalled inflation this year hasn’t derailed the Federal Reserve’s plans to eventually cut interest rates. That’s because it expects a slowdown in housing costs to eventually drag inflation close to its 2% target.
The problem: It has been waiting for that slowdown for 1½ years now, and it still hasn’t arrived. [actually at least two years but who’s counting?”
Market rents—rents on newly signed leases—surged three years ago, reflecting the unusual demand for more space unleashed by the pandemic, strong income growth and historically low inventories of homes for rent or purchase. Single-family home rents rose 14% in 2022, according to CoreLogic.
Because only a minority of leases turn over each year, changes in market rents are reflected in inflation with a lag. Accounting for that lag, Fed officials, Wall Street investors, and private-sector economists have expected housing inflation to slow since late 2022 based on what has already happened with market rents. [I have been harping about lease turnover for the same two years, and yes, I have been counting. It’s why expectation of soon to be falling rent have been dead wrong.]
Housing inflation has indeed slowed from a peak of 8.2% one year ago—but only to 5.6% in March, “a much slower pace than pretty much anybody anticipated,” said Jay Parsons, head of residential strategy at Madera Residential, a Texas-based apartment owner. [Anybody does not include me]
Housing “has not behaved the way we thought it would,” Chicago Fed President Austan Goolsbee said in an interview last month. “I still think it will, but if it doesn’t, we’re going to have a hard time” bringing inflation back to 2%.
The ‘last lag’ or the last mile?
Many economists still think it’s only a matter of time before housing inflation reflects the slowdown in new leases that began two years ago. It might be taking longer than expected because more renters are renewing their leases instead of buying a home, deterred by high mortgage rates. That could lengthen the time it takes for lower rents from newly signed leases to show up in overall inflation.
“I still think that check is in the mail, but unfortunately, it’s taking longer for that check to arrive than I anticipated,” said David Wilcox, an economist at Bloomberg Economics and the Peterson Institute for International Economics. “I just don’t see an alternative outcome other than those low lease rates eventually manifest themselves in the official price indexes.”
Higher car-insurance costs or hospital-service prices, for example, reflect big increases in auto prices and hospital wages two years ago, respectively, said Omair Sharif, founder of research firm Inflation Insights. “It’s the ‘last lag’ story, not the ‘last mile’ story,” he said.
“One of the surprises of the last six months, specific to multifamily, has been the reacceleration of demand,” Parsons said.
At Camden Property Trust, a Houston-based owner of 58,000 apartment homes, the share of tenants moving out to buy homes has fallen to 9%, the lowest in the company’s three-decade history and down from a traditional move-out rate of 15% to 18%.
“Most folks believed you would have had a massive falloff in rental growth throughout the Sunbelt,” said Ric Campo, chief executive of Camden. “But what’s happening is there’s been just a whole lot more demand than most people expected.”
More Demand Than Expected
What role did millions of illegal immigrants have on demand? Most of them have little money, but they have to stay somewhere.
Share of People Moving Drops to 9 Percent
According to data from the U.S. Census Bureau, moving rates for Americans declined from 12.8% in 2021 to 12.6% in 2022.
But what is it for 2024?
My guess has been 9 percent in a range of 8 to 11 percent or so. But we will not know that for two more years.
Moving Expectations
A New York Fed survey shows 1-year and 3-year look ahead moving expectations are at record lows.
Probability of Renters Buying a Home
Probability of Renters Buying a Home
- Twenty-five percent of renters have essentially given up on the idea of ever owning a home.
- The median expectation is a mere 35 percent.
- The average expectation is 40.1 percent.
All of those are record lows.
Trapped In Your House?
I discussed moving expectations in Trapped In Your House? Moving Expectations Hit Record Low
Some people replied moving expectations have been falling anyway. Yes they have, but expectations fell from 20.8 percent in 2014 to 16.4 percent in 2022, a decline of 4.4 percent in eight years.
In the next 2 years, expectations fell another 3.0 percentage points. Might I suggest home prices are in play?
Bear in mind, these are expectations, looking ahead one year. How many actually moved? 8%? 9%? 10%?
Methodologies that overstate new vs existing leases understate inflation.
Rent Prices Rose for the Third Straight Month According to Apartment List
Rents were not falling as reported recently by Apartment List. Nor are Apt List estimates correct now. Let’s discuss what’s really happening and why Truflation is wrong as well.
Rising rent prices was the subject in one of my posts earlier today.
Please see Rent Prices Rose for the Third Straight Month According to Apartment List
Truflation uses Zillow, Trulia, Redfin, Apartment List and CoreLogic. It claims “Our methodology for calculating rental price changes incorporates both new rental agreements and rental renewals, which provides us with a balanced view of price changes over time.”
But Zillow, Redfin, and Apartment List all have a huge flaw. They only capture new leases when only about 9 percent of the people move each year.
Comment From John Burns
I asked John Burns, CEO of John Burns Research and Consulting, LLC “What do you make of reports that rents are falling or soon will?
He replied “Rents are falling in some of the markets below, and rising elsewhere.” The list where “some” but not all are falling includes Charlotte, Austin, Raleigh, Phoenix, Nashville, Charleston, Salt Lake, Jacksonville, Denver, and Dallas.
Lags Kick in When?
The price of rent has gone up at least 0.4 percent for 31 straight months. I finally sense we are approaching the end of these big jumps.
Not Leading Just Wrong
Lagging turned out to be more lagging that some thought.
Aptartment List had M/M Oct, Nov, and Dec of 2022 at -0.9%, -1.1%, and -0.9%.
This is not leading, it is just wrong. Averaging that data in, with equal weight, if that is what Truflation did, is also wrong.
Wrong About What?
By wrong, I mean wrong for purposes discussed here.
The average person looking for a new apartment does not care one hoot about seasonal adjustments.
For the actual purpose of the Apartment List website, helping renters find places and what to expect, reporting without seasonal adjustments makes sense.
However, it does not make much sense for Truflation to give anything but zero weight to Apartment List.
https://mishtalk.com/economics/quotes-of-the-day-on-rent-inflation-by-the-fed-and-property-managers/
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