Housing is in the grip of an inflation storm — and it’s exacerbated by the COVID-19 pandemic

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Housing is the biggest expense for many Americans. And as far as the Consumer Price Index is concerned, it is doing a big loss out of the pockets of the people.

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The shelter component of the inflation barometer rose 0.4% between November and December, down slightly from the 0.5% increase in the previous month. Nevertheless, the annual increase set a record. Notably, the component that measures the uniform rent paid by homeowners for their homes grew by 3.8% between December 2020 and December 2021, the highest rate since 2007.

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The cost of shelter is the largest component of the overall Consumer Price Index, which reflects the importance of rent and mortgage payments to a home budget. For starters, it’s a necessity. Most people cannot avoid paying for housing, whether you rent or own.

,Tenants and buyers alike face headwinds.,

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Renters and buyers alike face headwinds for slightly different reasons. For buyers, supply constraints drive up prices for housing, exacerbated by the rising cost of materials such as wood. As people slowly return to the cities, renters are seeing a rise in rents.

But even though housing inflation has reached record levels in terms of the index, the increase appears small compared to other barometers of home prices. This is because the COVID-19 pandemic has complicated our ability to push housing inflation even further, especially because the CPI is based on survey data.

“As activity is now returning to cities that experienced exodus at the start of the pandemic, and existing leases take time to reset each year, the shelter CPI index lags in home price movements,” said Katherine Judge, Director and Senior Economist told CIBC Capital Markets. “The shelter index is still holding up.”

,‘The Shelter CPI Index lags behind the volatility in domestic prices.’,


–Katherine Judge, Director and Senior Economist at CIBC Capital Markets

A leading measure of home prices, the S&P CoreLogic Case-Shiller Home Price Indices reported a 19.1% annual increase in home prices nationally in October, the most recent month for which data is available. Meanwhile, the most recent National Fare Report Apartment list from real estate website showed that the average fares across the country increased by 17.8% during 2021.

Economists say this discrepancy between housing inflation as raised by the CPI and rising housing prices seen with other indicators is by design. The housing components of the CPI are “designed to measure the cost of living from month to month,” said Paul Ashworth, chief North America economist at Capital Economics. “Therefore the CPI should not fully reflect changes in housing capital values.”

And it’s understandable. For the vast majority of homeowners, the cost of owning a home does not vary much from month to month or from year to year, as most people these days use fixed-rate mortgages. So while taxes may fluctuate somewhat, in the case of mortgages the cost will not change until they refinance after purchasing the home.

It is the same for tenants. Most people who rent out their homes are only faced with higher prices when it comes time to move or renew their leases – and even then, those who choose the latter usually end up relocating. Will see a small increase in fares as compared to the ones. As such, consumer spending measures can reduce rent increases and house prices more broadly.

Has housing inflation reached its peak?

Most economists agree that the CPI’s measure of housing costs still has room for growth – even though other housing-cost barometers have already shown signs of slowing growth.

“The shelter cost gauge in the CPI lags measures of home prices by at least a year, perhaps two years,” said Stephen Stanley, chief economist at Amherst Pierpont. “So the jump in house prices that started in mid-2020 only started to reflect in the CPI in the last few months.”

But how long it will take for housing inflation to peak before normalizing is debatable. In the past, the CPI’s rent measurement for homeowners has lagged other measures of market rent, typically by between nine and 12 months. CoreLogic. according to a report of Released in September.

“My guess is that market rent growth probably peaked in December, which means the shelter component could intensify until August,” said strategist Christophe Baroud, chief economist at Market Securities France SA.

However, some analysts believe that the peak of inflation may be coming soon. Jefferies chief economist Anita Markoska and money market economist Thomas Simmons wrote in a research note on Wednesday that the CPI’s rent measurement could reach its peak in February or March.

“The CPI housing components are driving down market rents, which have risen sharply, and it is not entirely clear why,” he wrote, as the CPI’s housing barometer “has not even begun to catch on.” did, at this point we’d probably have to assume they wouldn’t.”

What does this mean for the Fed?

In light of runaway inflation, the Federal Reserve has indicated it will take swift action to cool the economy. Central bankers have indicated that they will both increase interest rates and reduce their bond-buying activities as a result.

Even if housing inflation reaches its peak in the coming months, the US and the Fed alike cannot expect the situation to correct itself quickly. For starters, the pandemic-era home buying craze has proven that millennials have entered the housing market – and they are giants.

“They are about 46.1 million strong,” Baroud said, “and make up the most significant demographic patch ever recorded.”

,‘The only way to calm the housing market is through a supply shock.’,


– Christophe Baroud, Market Securities France SA . Chief Economist Strategist

Many of these homeowners were delaying the decision to buy a property because of their large student loan burden, he said. Meanwhile, the supply of homes for sale remains near record-low levels and has shown no improvement.

These Millennials buyers are not only driving home prices higher, but they will also continue to drive up rents as long as they delay acquiring home ownership.

The Fed’s arsenal of tools may not be able to address the resulting housing crisis that should ensure that high housing inflation is here to stay.

“Rising longer-term interest rates could lead to an increase in mortgage rates, and therefore a slower growth in housing prices, but it would not be enough to reverse the positive trend,” Baraud said. “The only way to significantly calm the housing market is through a supply shock, because I don’t see US politicians enforcing rent limits.”

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