The latest inflation data showed that rents remained stubbornly high in November, but real-time data suggest that national rental prices could decline in 2023.
The shelter component of the Consumer Price Index (CPI) for November – which accounts for about a third of the headline inflation index – rose 0.6% month-on-month and 7.1% year-on-year. The shelter component includes rental prices and what it would cost the landlord to rent an equivalent apartment, known as owner-equivalent rent.
But at the same time, real-time data shows that rents across the country have declined for the third straight month. And given the lagged nature of the CPI, inflation data will likely take time to reflect this reality.
“The single largest core component of the CPI – rent – is still rising rapidly, but the rate of increase has peaked in recent months,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note after Tuesday’s data. , adding, “It is becoming increasingly clear from private sector rent data that the next big move in the CPI measure will be a substantial slowdown.”
Housing costs were “by far the biggest contributor” to the overall CPI gain, the Bureau of Labor Statistics said on Tuesday. Overall, consumer prices rose at an annual pace of 7.1%, while the core consumer price index, which excludes the volatile food and energy sectors, rose 6% year-on-year.
But data from Zillow’s Observed Rent Index showed that asking rents for new leases across the country fell 0.4% from October to November, the biggest one-month drop in the survey’s seven-year history. The national average asking price for rent is now $2008, according to the survey, 8.4% higher than the same period last year.
RealPage data also indicates a dramatic slowdown in rent growth, which reached 6.5% year-over-year for new rentals. That is the lowest reading since June 2021 and down from a peak of 15.7% in March 2022.
“The market has changed very quickly here from a market favored by housing providers to one that is really shifting in favor of renters who are seeing higher vacancies,” said Jay Parsons, vice president and head of economics and industry at RealPage, in a webinar on Tuesday.
The Fed’s Housing Dilemma
With these inflation dynamics showing a divide between real-time and government data on inflation, investors are weighing how this could impact future Federal Reserve actions.
On Wednesday, the central bank announced a 0.50% interest rate hike, the seventh and final rate hike of 2022, a year in which there has been a cumulative 4.25% rise in interest rates, the biggest since 1980.
Leases “will be renewed in a market where rates are higher than when the original leases were signed,” Fed Chair Jerome Powell said at a news conference on Wednesday. “But we see the rate for new rents coming down. So once we work to resolve this backlog, inflation will come down next year.”
During his last press conference in November, Powell acknowledged that while the policy is overdue, “there are still some significant rate increases coming” to rental prices as the cheapest leases renew at higher market rates.
However, some experts are concerned that the central bank could overestimate how much “lift” is left on expired leases that are about to be renewed.
“As we see from our data, this acceleration potential is actually much less than [Powell] may be indicating,” Parsons said.
In other words, while Powell and the Fed forecast a slowdown in rent inflation next year and a general easing of price pressures, real-time data suggest that the drop could be even steeper than the Fed expects.
Data from RealPage shows that the rent loss premium – the difference between new leases on the market and existing leases – fell from 9.4% in June to 5.8% in October, as housing market pressure tightened. ample worked to slow new leases and accelerated renovations.
Looking ahead, the change in the loss-to-lease premium adds up to three things, Parsons wrote.
First, renewal rent increases will slow down significantly going forward. Second, the CPI housing index is lower for both new leases and built-in leases. And third, there is some upside for real estate investors, as cap rates will have to rise due to higher rates and a lower loss-to-rent rate.
“As that gap narrows… there’s less room for renewal,” Parsons said. “You can’t raise your renovation rents above the market rent,” as that would encourage renters to move or look elsewhere.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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