Housing costs are a major driver of overall inflation, keeping living expenses higher as other facets of the economy show some signs of easing.
Most estimates show actual home prices slowing - even dropping – after two years of steady increases. They offer hope that housing prices are starting to slow.
But the intense scrutiny of inflation makes shelter look like a larger inflation component than it actually is. And perception often factors as much into driving prices as actual economic forces.
Despite a drop in median home prices over the last three months, the government does not use “actual” home prices when calculating inflation because they consider a home purchase to be a long-term investment rather than a consumer good.
Instead, the Consumer Price Index (CPI) calculates imputed rent, or what homeowners would pay each month to rent their own house. Those rent increases are now feeding into the CPI and other inflation measures.
Home prices surged during the pandemic, boosted by low mortgage rates, changes in home-buying preferences, population trends and low inventories of homes for sale.
Bidding wars overheated the housing market for more than two years. Potential home buyers priced out of ownership sought rentals, and the increasing demand led to similar price run-ups in the rental market. Rent and shelter now account for a quarter of total inflation.
Due to the way it is calculated, housing inflation significantly lags current market conditions. As a result, a large portion of current inflation actually occurred last year and is only now showing up in statistics.
Because has a large weight in the CPI basket, it has been responsible for a large proportion of core inflation in recent months and will likely continue to dominate.
While inflation growth cooled from 8.2% in August to 7.7% in October, shelter prices jumped 0.8% from September — the largest monthly increase in that category since August 1990, according to the Bureau of Labor Statistics.
The problem is particularly pronounced in coastal cities. On a statewide basis, Florida and California had six of the nine most unaffordable markets. But Northeast cities are also feeling the pinch. The pandemic “exodus” from cities seems in full reverse.
In brighter news, rents showed signs of leveling off in September, with year-over-year growth slowing to 8.8% after hovering near 20% most of 2022. Though they are still up year-over-year from 2021, the median home price dropped to $379,100 in September, the third straight month of decline.
The middle of the country continues to be the most affordable place to rent. Oklahoma City was the most affordable of the 50 largest metros in August with a median monthly rent of $973.